[Originally published July 27, 2021. Updated February 2025]

If you’re a manufacturer, wholesaler, or a reseller, you know that collecting resale and tax exemption certificates is par for the course. Like most things tax-related though, it’s often not as simple as collecting a document and calling it a day. Rules for collecting certificates can vary based on the state, products involved, business relationships, and a variety of other factors. If that wasn’t hard enough, the rules themselves are prone to frequent regulatory changes.

Let’s take a closer look at how to avoid common mistakes, when dealing with the intricacies of exemption certificates. Here’s what we’ll cover:

  1. Common Mistakes to Avoid
  • Accepting expired certificates
  • Failing to validate the accuracy of the information
  • Not keeping certificates up to date with current regulations
  • Improper storage leading to lost or inaccessible certificates during audits
  • Not obtaining certificates at the point of sale
  • Overlooking the need for periodic renewal of certificates
  • Neglecting to train staff adequately on exemption certificate procedures
  1. Best Practices for Certificate Management
  • Understanding Sales Tax Obligations
  • Collecting Certificates at the Point of Sale
  • Validating Certificates Promptly
  • Implementing a Centralized Storage System
  • Automating the Management Process
  • Regular Training for Staff
  1. Consequences of Non-Compliance
  • Financial Penalties and Interest Charges
  • Increased Likelihood of Audits
  • Damage to Business Reputation and Loss of Customer Trust
  • Legal Implications

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1. Common Mistakes to Avoid

To start, one of the most common mistakes businesses make when collecting exemption certificates is not collecting the right resale or tax exemption form. To know which form must be collected, a business must be familiar with a variety of rules pertaining to sales tax nexus and compliance. For instance, if you’re a business based in Rhode Island shipping goods for resale to your customer across state lines into Massachusetts, your customer must provide you with a valid Massachusetts Resale Certificate in order to substantiate that the sale is indeed tax-exempt. This is due to the nature that sales tax rules for transactions are typically based on the ship-to-state. If your customer were to provide you with a Rhode Island Resale Certificate, and you accept this certificate without charging sales tax and forget to remediate this, you may find your business taking on an expensive liability during your next sales tax audit.

You may ask yourself; I have the ship-to-state covered, what else? Well, nine states including Alabama, California, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, and Washington along with Washington D.C. do not allow sellers to accept out-of-state resale certificates. Outside of these states, as long as you have a valid resale certificate in at least one state, you’re generally able to use that certificate to substantiate a tax-free purchase intended for resale. However, in these states, if you want to use a resale certificate, you need to register to collect sales tax in that state.

Unfortunately, it is at this stage that a lot of businesses get themselves into trouble. If you as a business register, you will be able to use a resale certificate in that state to purchase inventory for resale tax-free. However, by registering, you may not know that you’re now required to collect sales tax from buyers in that state, as well as file periodic tax returns in perpetuity. Either way, the rules for many states are set up in a way that encourages (or discourages depending on your perspective) compliance with state tax rules if you want to do business in that state.

More Common Mistakes

Here are some more common mistakes businesses make in handling exemption certificates that can lead to compliance issues:

  1. Accepting expired certificates: Expired certificates can invalidate your tax exemption, leaving you exposed to tax liabilities. Always check the expiration dates on each certificate.
  2. Failing to validate the accuracy of the information: It’s crucial that the details provided on each exemption certificate are accurate. Misleading or incomplete information could result in the certificate being deemed invalid.
  3. Not keeping certificates up to date with current regulations: Sales tax laws change frequently. Failing to ensure that exemption certificates comply with updated regulations can lead to costly mistakes during audits.
  4. Improper storage leading to lost or inaccessible certificates during audits: If certificates are not stored properly—whether digitally or physically—you could face difficulties retrieving them during an audit.
  5. Not obtaining certificates at the point of sale: Waiting until after the sale to request exemption certificates may complicate the process and result in errors.
  6. Overlooking the need for periodic renewal of certificates: Exemption certificates often need to be renewed regularly. Failing to do so can create compliance issues later on.
  7. Neglecting to train staff adequately on exemption certificate procedures: Employees need to understand the importance of proper certificate handling. Without adequate training, businesses risk non-compliance.

2. Best Practices for Certificate Management

To help small and large businesses alike tackle these challenges and reduce painful tax penalties, we recommend businesses utilize an exemption certificate manager (ECM) which enables them to collect, validate, and renew exemption certificates in one simple and easy-to-use platform. A good ECM solution will help automate key portions of the exemption certificate management process, enabling you to reduce your audit risk.

To add to the employment of a good ECM within your processes, below are a few more best practices for managing exemption certificates:

  1. Understanding Sales Tax Obligations: It’s essential for businesses to know the specific sales tax laws and exemption criteria in each state where they operate. Being informed helps ensure that you collect the correct certificates and stay compliant with local regulations.
  2. Collecting Certificates at the Point of Sale: Always collect valid exemption certificates at the time of the transaction. This ensures that you have the necessary documentation in place before completing the sale, reducing future complications.
  3. Validating Certificates Promptly: Upon receipt of an exemption certificate, verify its completeness and accuracy. Early validation helps avoid issues down the line and ensures compliance with the specific state’s requirements.
  4. Implementing a Centralized Storage System: Whether physical or digital, establish a secure and organized system for storing certificates. This system should allow for quick retrieval during audits and make it easier to track renewals.
  5. Regular Training for Staff: Provide regular training sessions for employees involved in sales and tax compliance. Ensuring that staff is well-versed in the proper procedures for handling exemption certificates can significantly reduce human error and improve overall compliance.

3. Consequences of Non-Compliance

Now, let’s assume you’ve done everything right—collected the right certificates, validated them properly, and stored them securely. But what happens if you don’t? There are serious consequences to non-compliance with exemption certificate requirements. Here are some potential repercussions:

  1. Financial Penalties and Interest Charges: If your business fails to collect the appropriate sales tax due to improperly handled exemption certificates, you may be required to pay back taxes along with penalties and interest. These financial burdens can add up quickly and affect your business’s cash flow.
  2. Increased Likelihood of Audits: If your business frequently deals with invalid or incomplete exemption certificates, it increases the likelihood of being selected for a sales tax audit. Audits can be time-consuming, costly, and often lead to further scrutiny.
  3. Damage to Business Reputation and Loss of Customer Trust: If customers or suppliers find out your business isn’t complying with tax laws, it can damage your reputation. Losing trust can result in customers taking their business elsewhere and suppliers hesitating to work with you in the future.
  4. Legal Implications: Failure to adhere to state regulations can result in legal consequences. Whether it’s paying retroactive taxes, facing fines, or potentially dealing with more severe legal actions, non-compliance could put your business at significant risk.

John Serdar is a Co-Founder and CFO of EXEMPTAX, a service provider dedicated to helping businesses deal with the challenges of tax exemption certificate compliance. Over the last 10 years, John has worked with numerous Fortune 500 companies in integrating end-to-end accounts receivable, payable, and tax management outsourcing solutions. Prior to EXEMPTAX, John was the Lead Finance Project Manager at Arvato North America, a leading international outsourcing provider with over 70K employees in more than 40 countries. John is a CFE, PMP, and earned his B.A. from the University of California, Los Angeles.

For more help with this somewhat complex matter, come to Miles Consulting – making everything clearer for you, is what we do.

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