AUTOMATING
THE EXEMPTION
CERTIFICATE LIFECYCLE
Reduce non-taxed transaction audit risk, increase
staff productivity and improve the exempt customer
purchase experience
Page 1 of 11
Prudent and proactive businesses are constantly investigating and implement-
ing new methods to reduce their sales and use tax audit liability and increase staff
productivity since these savings go directly to the bottom line. In today’s economic
environment, these goals have taken on added urgency. With virtually all states
experiencing significant revenue drops and higher demands for state services due to
the slow economy, states are being very aggressive in their sales and use tax audits
to help increase their revenues. Astute businesses have already, or are in the process
of making moves to reduce their own sales and use tax liability risks to lessen the
pain and dollar amount of an assessment.
The slow economy has shrunk top line growth for many companies causing them to
look to cost cutting to maintain or slow decreases in the bottom line. Once again,
proactive managers realize the importance of providing the tools their businesses
need to be more productive and to adopt sales and use tax best practices that fur-
ther reduce costs and audit liability.
Businesses that are best prepared to handle this type of environment have imple-
mented Exemption Certificate Management (ECM) software to automate the collec-
tion and management of certificates and have integrated this software with their
Enterprise Resource Planning (ERP)/billing and tax decision software to complete
and automate the “Exemption Certificate Lifecycle.”
Automating this process is not only critical for manufacturers, wholesalers and retail-
ers, but also for businesses in any industry with sales tax exempt transactions, no
matter the sales channel. The most powerful ECM solutions can handle the collec-
tion and management of certificates in direct, retail, e-commerce, POS and tele-sales
channels simultaneously and in real time.
By connecting these systems, each is able to share critical data needed to reduce
non-taxed transaction audit risk, increase productivity by automating manual certifi-
cate processes and improve the exempt customer purchase experience.
“...in this world nothing is certain
but death and taxes.”
Benjamin Franklin
Introduction
Automating the Exemption Certificate Lifestyle
Page 2 of 11
Understanding the
Exemption Certificate Lifecycle
The Exemption Certificate Lifecycle is the recurring process exemp-
tion certificates go through from their creation, to their ongoing use
in future transactions and audits, to their renewal when they expire
or are classified as invalid.
Figure 1
ECM
Software
Customer and transaction data
Tax decisions (rules and rates)
Cu
sto
me
r r
ec
or
dsCertificate data
ERP/Billing
Software
Tax Decision
Software
Sales and Invoice
origination
There are three primary components of the Exemption Certificate Lifecycle (Figure
1): ECM software, ERP or billing software and tax decision software. All three are criti-
cal for minimizing non-taxed transaction audit exposure, increasing staff productivity
and improving the exempt customer purchase experience.
The Exemption Certificate Lifecycle consists of three primary steps initiated by a sales
or invoice origination and certificate request, but thereafter, the cycle really never
stops.
Page 3 of 11
Initiation of certificate process
The first step begins with the customer and the ERP software because this is where
sales and invoices originate. When customers are exempt from sales tax, statutorily
the seller needs to collect an exemption certificate from them. However, often times
customers do not know what documentation to provide and those taking the order
do not have the certificate expertise to know which documentation they need. In
addition, the certificate collection process itself can be time consuming because of
the lack of knowledge on both sides or due to a lack of process on the seller’s side,
resulting in a poor customer purchase experience.
Ensuring accurate collection
In the automated Exemption Certificate Lifecycle, these issues are solved with intel-
ligent ECM software. Customer data is passed to the ECM software and requests
for certificates are automatically sent to customers. Intelligent ECM software will
track the status of requests and help ensure customers provide only valid certificate
information for their transactions. Intelligent ECM software can retrieve and provide
copies of certificates to auditors.
In addition, ECM software serves as the “source of truth” for certificates and will man-
age certificates, including tracking certificate expirations and certificates that have
been deemed invalid. The management of all certificate data plays a critical role in
the tax decision software.
Communication with tax decision software
The ERP software interacts with the tax decision software because it needs to know
what tax amount, if any, it needs to apply to invoices for customers. If the tax deci-
sion software has accurate certificate data, then customers who are exempt from
sales tax will be billed correctly. If not, then not only will exempt customers be billed
incorrectly but the seller is also increasing its audit exposure and risk.
Automating the Exemption Certificate Lifestyle
Page 4 of 11
Three software components are necessary for automating the ECM
lifecycle: ECM software, tax decision software and ERP or billing
software.
Exemption Certificate Management Software
Generally, ECM software can be broken into two types: standard and intelligent.
Exemption certificate management can be performed in-house or in many cases,
outsourced. The workings and benefits of the Exemption Certificate Lifecycle apply
in either case.
Standard ECM software
Is often a desktop-based software—Desktop-based software requires installation
on the computers of the staff and usually requires routine maintenance to ensure
the latest version is installed, which may mean purchasing and installing addi-
tional releases of the software. It also means the software cannot be accessed from
anywhere other than your desk (no remote office access, no home access, no access
when traveling and no direct access by auditor).
Digitally stores exemption certificates—Certificates are imaged, indexed and
quickly located, eliminating paper and the need for filing cabinets to store certifi-
cates.
Assists in the collection of exemption certificates —In many cases standard ECM
software displays which customers have been sent certificate requests, the date sent
and whether a certificate has been received.
Provides reports to assist in the management of certificates—Reports usually
provide details about customers and their certificates and sometimes highlight staff
productivity.
Intelligent ECM software will perform the functions of standard ECM software but
includes additional, powerful features and benefits that further minimize non-
taxed transaction audit liability, increase staff productivity and improve the exempt
customer purchase experience. Intelligent ECM software maximizes the benefits of
automating the Exemption Certificate Lifecycle.
Document Management
Software is NOT ECM
Document management software
centrally stores certificates, but lacks
the other functions of ECM software
that are critical to reduce non-taxed
transaction audit exposure, increase
staff productivity and improve the
exempt customer purchase experi-
ence—without disrupting workflow.
ECM software provides critical work-
flow enhancement for manufacturing,
e-commerce, retail, wholesale and
many other channels of distribution.
Three Software Components Needed to
Automate the Exemption Certificate Lifecycle
Page 5 of 11
Intelligent ECM software
Is a Software as a Service (SaaS) solution —A web-based solution that
minimizes installation cost and time since only an Internet connection is
needed. Software maintenance is almost never an issue or a cost, since
software updates are provided automatically upon logging into the software. Soft-
ware updates are usually included in the licensing agreement.
Automates the process of collecting exemption certificates—Customer
records can be automatically imported into ECM software with the system
automatically sending certificate requests to customers.
Tracks the progress of collecting certificates—Provides notifications when your
customers have taken action on a certificate request and sent back a completed
certificate.
Helps to ensure the completeness of certificates—Provides a mechanism to help
ensure customers have filled in all required fields on the correct form and have sent
the form back to the system.
Eliminates lost certificates —Allows certificates to be signed electronically and
instantly captured in the system. Web-based solution enables centralized, digital
storage of certificates.
Tracks certificate expirations—Provides automatic determination of form
expiration based on rules for each form. The expiration function enables
certificate renewal requests to be sent for certificates before or after certificates
expire.
Provides ability to review certificates—There are cases when certificates sent by
customers are not valid. A review function enables these certificates to be marked as
invalid and initiate a request sent to the customer for correction.
Automates the collection of certificates that have expired or been marked
as invalid—Provides ability to send electronic renewal requests for existing
certificates that are about to expire, have expired or been marked as invalid.
Critical Tool for
Credit and Sales Departments
Since intelligent ECM software en-
sures valid certificates are collected
and tracks expirations, it eliminates
the need for credit and sales person-
nel to have additional training or
expertise in exemption certificates.
Automating the Exemption Certificate Lifestyle
Page 6 of 11
Provides auditor tools—Enables fast access and viewing of requested
certificates to auditors.
Supports customer bill-to/ship-to and job hierarchies—Often times a single
certificate will apply to many company ship-to locations. Intelligent ECMs provide
support for these types of complex customer relationship hierarchies.
Integrates with ERP and tax decision software—Automates the export of
certificate data to tax decision software and the import of customer records from
ERP software. This trilateral process (the Exemption Certificate Lifecycle) ensures
customers have valid certificates and sales tax is billed only when required.
Increases staff productivity—Gone are the days of Excel spreadsheets and mail
merges. Intelligent ECM software automates and streamlines most of the manual
processes commonly associated with collecting and managing certificates.
Supports all sales channels—Has the capability to lookup and collect certificates
and share certificate data in real-time for direct, retail, e-commerce and tele-sales
sales channels.
Improves the exempt customer experience —The automation of certificate
workflow and the Exemption Certificate Lifecycle enable non-taxed orders to be
processed quickly. Built-in certificate best practices eliminate the need for credit,
sales or other departments to have exemption certificate expertise when looking
up or collecting certificates.
At a minimum, ECM software should provide your company an easy way to locate
and collect exemption certificates from your customers. However, using the
increased leverage provided by intelligent ECM software, your company can really
begin to harness technology to automate the Exemption Certificate Lifecycle to
eliminate non-taxed transaction audit risk, increase staff productivity and improve
the exempt customer experience.
Page 7 of 11
Tax Decision Software
It is beyond the scope of this white paper to go into the detailed functions of tax
decision software. Instead, this paper will provide a brief overview of tax decision
software and why it is critical to receiving the maximum benefits from automating
the Exemption Certificate Lifecycle.
In general, tax decision software determines the taxability and tax rate of a transac-
tion based upon several factors in the transaction. Some of these factors include:
• the purchase order;
• information about the product being sold;
• the location of the purchaser and seller; and
• any other factors that affect the taxability of the transaction.
Some common tax decision software vendors are AvaTax, Sabrix, Taxware
and Vertex.
Taxability and audits—Once taxability and the tax rate are determined, this infor-
mation can be fed into an ERP so an invoice will reflect the correct sales tax amount.
Now your business can rest assure that the customer has been billed the correct
sales tax amount and if audited, the auditor will simply throw up his hands and walk
away unable to find any errors. Right?
In theory, this sounds great, but in practice, it is missing one critical piece to ensure
that the auditor is duly satisfied. How do we know that the correct tax decision
was made by the tax decision software? Most of this determination is based upon
information loaded into the software. If this information is faulty, then the tax
determination could be faulty as well, and the auditor will have a reason to make an
assessment.
Correct tax determination and exemption certificates—One critical piece of infor-
mation that will help ensure the tax determination is correct comes from customers’
exemption certificates. For example, if there were an expired certificate on file for a
customer, but this critical information did not get into the tax decision software in a
timely manner, guess what? The tax decision software will assume the customer is
exempt from sales tax and no sales tax will be billed. Now, when the auditor looks at
this transaction, he is going to discover the certificate was expired and that you
improperly did not collect sales tax on the transaction. This will lead to an
assessment and this single error could be extrapolated into a large assessment.
Automating the Exemption Certificate Lifestyle
Page 8 of 11
Even a Single Error Can Lead to a
Large Audit Assessement
“When performing a dollar strati-
fied sample, a single error can be
projected if the transaction is not
extraordinary and frequency of
occurrence can be proven.”
Texas Decision of the Comptroller
of Public Accounts,
Hearing No. 44,751
Integrating tax decision software and ECM prevents errors—Integrating tax
decision software with intelligent ECM software prevents this type of error and other
costly errors. Intelligent ECM software can be setup to automatically export certifi-
cate data into tax decision software at regular intervals, or on-demand as transac-
tions are processed. In the above example, the tax decision software would have
known the customer had an expired certificate on record and tax information would
have been correctly transferred to the billing software.
In addition to ECM and tax decision software, ERP/billing software is needed to
apply the correct tax based on tax decision and ECM information.
ERP/Billing Software
As with tax decision software, it is beyond the scope of this white paper to go into
the complex details of ERP/billing software. Instead, it will explain why ERP/billing
software makes up the last critical piece for automating the Exemption Certificate
Lifecycle.
Typically, ERP/billing software is where most businesses store information about
their customers. This information can be billing and shipping addresses, contacts,
purchase history, open orders and more. When businesses acquire new customers
or changes to existing customers need to be made, those changes are entered into
this software. New customers and changes to existing customers are critical data
pieces in ensuring the Exemption Certificate Lifecycle is operating at maximum
accuracy. Some large, common ERP software makers are Intuit, Sage, Microsoft,
Intacct, Oracle and SAP.
For new exempt customers, you need to collect valid certificates as quickly as
possible to ensure they are billed correctly and to speed the release of orders.
Intelligent ECM software automatically imports customer records and sends
certificate requests to these new customers ensuring up-to-date information on
customers is available to the ECM software for sending renewals and managing
certificate information.
Page 9 of 11
Figure 2.
Figure 2 describes how the pieces of the Exemption
Certificate Lifecycle work together to ensure your company
minimizes non-taxed transaction audit liability and maximizes staff
productivity as well as the exempt customer purchase experience.
Benefits of Automating the
Exemption Certificate Lifecycle
Key Benefits of Automating the Exemption Certificate Lifecycle
Minimized Non-Taxed
Transaction Audit Risk
Centrally stored certificates and
accurate exempt billings
ensure minimized non-taxed
transaction audit risk.
Increased Staff Productivity
Manual processes are automated,
freeing time and resources
and reducing errors.
Improved Exempt Customer
Purchase Experience
Exempt orders process
quickly with correct sale tax
amount on invoices.
Customer Records
Schedule automatic customer record
imports into ECM software from ERP/
billing software.
Collect Certificates
ECM software automatically requests
certificates. Certificates stored digitally
in central database.
Review Certificates
Staff determines certificate validity.
ECM software tracks expirations.
Certificate Data
Schedule automatic certificate data
exports into tax decision software.
Bill Customer
Tax decision software accurately
determines taxability.
ERP/billing software invoices correct
sales tax amount.
Sales and Use Tax Audit
Accurate billing and certificates ensure
auditors find very few discrepancies.
• Reduces Non-Taxed Audit Liability. Ensures exempt transactions are only pro-
cessed if valid certificates are on file and enables you to prove it to an auditor.
• Decreases Billing Errors. Tax decision software will know automatically which
customers are exempt from sales tax and the ERP will bill the correct sales tax
amount thereby reducing tax-only credit memos.
• Automates and Accelerates Certificate Collection. Certificate requests for new
customers and renewal requests for expired or invalid certificates can be auto-
matically sent electronically.
• Improves Collection of Valid Certificates. Intelligent ECM helps to ensure valid
certificates are submitted by exempt customers.
• Increases Productivity and Efficiency. Eliminates paper, manual processes,
sales tax refunds and short-pays. Intelligent ECM eliminates the need for cer-
tificate expertise in your credit and sales staff because it provides built-in best
practices.
• Supports Exempt Transactions in Shopping Carts and POS Systems. Intel-
ligent ECM software can often support the real-time lookup and collection of
certificates in e-commerce applications and directly from POS systems and then
automatically transfer the certificate data to the tax decision software to make a
tax decision—all without disrupting the purchase process.
• Improves Management and Oversight of Billing Process. Connectivity of
the three systems improves visibility of the billing process and ensures policy
changes are easier to implement.
• Eliminates Manual Entry of Certificate Data. When new certificates are added,
or existing certificates are changed in the ECM, this certificate data is automati-
cally transferred to the tax decision software, eliminating the need to manually
enter this data and reducing data entry errors.
• Eliminates Manual Entry of Customer Data. When new customers are added,
or existing customer data is changed in the ERP system, this customer data is
automatically transferred to the ECM, eliminating the need to maintain this
information in two places.
• Displays Certificate Information for a Customer Inside the ERP. Some ERP
software have the ability to retrieve certificate information from ECM software
and display a list of certificates a customer has on file, the certificate images and
the status of certificate requests, all inside the ERP, eliminating the need to go to
the ECM software to view this information.
Automating the Exemption Certificate Lifestyle
Page 10 of 11
Every department in every company is asked for ways to contribute to cost savings or
productivity. Today, these calls are especially loud for any company dealing with tax
exempt customers. In the current tough economic environment where state tax rev-
enues are plummeting, while demand for public services is rising, most states are ag-
gressively stepping up efforts to collect revenue and close these deficits. One method
states are using to increase revenues is to be much more aggressive with sales tax
audits.
Proactive businesses are successfully meeting this challenge by providing their de-
partments the tools necessary to dramatically reduce their sales tax liability and, in
the process, significantly increase staff productivity.
These astute businesses have minimized their business’ sales tax liability because they
have implemented Exemption Certificate Management (ECM) software to automate
certificate collection and improve the validity of certificates submitted by custom-
ers. Furthermore, they have gone a step further to inoculate themselves against sales
tax assessments by integrating ECM software with their enterprise resource planning
(ERP) or billing software and their tax decision software to automate the Exemption
Certificate Lifecycle.
The automation of the Exemption Certificate Lifecycle provides a number of key
benefits:
• Increased speed and automation of certificate collection.
• Improved validity of certificates submitted by customers.
• Decreased non-taxed transaction billing errors.
• Reduced non-taxed transaction audit risk.
• Reduced staff time and effort in preparing for and managing auditor requests.
• Increased staff productivity by automating manual certificate processes.
• Improved exempt customer purchase experience.
• Elimination of manual entry of certificate data into tax decision software and
customer data into ECM software.
To fully reap the benefits of the Exemption Certificate Lifecycle, businesses need ECM
software capable of doing the job. AvaTax Certs is the only intelligent ECM software
that fits this role. As the most powerful and capable ECM software available, AvaTax
Certs fully enables all the benefits of automating the Exemption Certificate Lifecycle.
Summary
Page 11 of 11
Getting started with AvaTax is easy.
call: 877.780.4848 visit: www.avalara.com
Based on Bainbridge Island, Washington, Avalara is transforming the sales and use tax
compliance process for businesses of all sizes. With point-and-click ease, Avalara provides the
fastest, easiest, most accurate and affordable way for companies to address their sales and use
tax compliance. Avalara is the industry’s most trusted provider of solutions, serving more than
40,000 registered users located throughout the U.S., Canada and abroad, delivering more than
350 million sales tax transactions, and filing and remitting more than $10 billion in tax
collections per year.
Avalara may have patents, patent applications, trademarks, copyrights, or other intellectual
property rights governing the subject matter in this document. Except as expressly provided
in any written license agreement from Avalara, the furnishing of this document does not give
you any license to these patents, trademarks, copyrights, or other intellectual property.
© 2011 Avalara, Inc. All rights reserved.
Avalara, AvaTax Calc, AvaTax Returns, AvaTax Certs, AvaRates, TrustFile, BPObridge,
Laserbridge+, Sales Taxll, Sales TaxPC, SalestaxPC+, StatetaxII, and StatetaxPC are either
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About Avalara
Automating the Exemption Certificate Lifecycle
Using cloud-based technology to automate reseller certificate management can save your business thousands of dollars in an audit and improve the exempt customer purchase experience. Download this white paper and learn the best practices necessary to keep your business prepared & productive!
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