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Exemption Certificate Management Tips: Analysis to Automation

author photo of Joni Johnson-Powe

Let’s start with a fundamental question that many start-up companies often ask me... Why do I need to collect exemption certificates - and how best to do that? Well - first things first ...

What exactly is an exemption certificate?

An exemption certificate is generally issued by a buyer to a seller that quite simply states “do not apply sales or use tax to my purchase”. It can take many forms including:

  • Multistate Tax Commission Certificate of Exemption: This document can be issued for multiple states where a company has an exemption. You can find this certificate at:
  • State Issued Exemption Form: These can include a blanket exemption for all purchases, industry specific exemptions such as manufacturing, or special purpose such as an occasional sale or temporary storage.
  • Letter: Another possibility is a letter which includes the purchaser’s company name, Federal Identification Number (FEIN #) or state registration identifier, description of the exemption claimed, and jurisdiction to which the exemption is claimed.

What happens if you do not collect exemption certificates?

Well, an auditor will potentially assess a deficiency under audit in most circumstances if you do not have record of a customer’s exemption for applicable charges for which you did not assess sales and use tax. This assessment generally will include penalties and interest in addition to the tax due. Also, consider that if you incorrectly failed to assess tax or collect an exemption certificate, more than likely you will have a difficult time later collecting the tax from the buyer or may lose a customer if you do pursue collection of the tax.

What can you do to effectively manage your sales and use tax audit exposure as related to customer exemptions?

  1. Analyze and understand your company’s sales cycle: Often your sales folks have the best relationships with your customers and are the first point of contact. Therefore, taking the time to understand how a sale is initiated, closed and posted is an important step to establishing a policy on how to handle exemption certificate requests and management.
  2. Organize "customer contact" groups: Gather groups involved with customer engagement and initiation, account management, retention and invoicing. These groups can include sales, accounting, operations, sales, and/or collections. I suggest providing an overview of how sales and use taxes work and why gathering exemption certificates is important.
  3. Collaborate and communicate: Solicit feedback from your key groups. Rather than independently directing that a certain group or groups are responsible for collecting the certificates, collaborate with key groups to establish where in the sales process gathering of exemption certificates best fits. Questions to consider:
  • Should a customer be designated as exempt by the sales representative upon initiating a sale to a new customer and then communicated to the tax department? Or should another group like accounting or customer service be involved first?
  • What should be the form of communication for an exempt customer and who is responsible for obtaining the certificate?
  • If a certificate has not been received by a customer claiming sales tax exemption, how will this affect customer account set-up or invoicing? How will credits for exempt customer initially taxed for lack of exemption certificate on file be handled? Does the Finance or Tax Department need to approve the credits?

4. Consider sales tax automation tools available to help manage exemption certificates: Some ERP systems have some tax exemption functionality but usually these systems are less robust than off-the-shelf exemption software packages. If you have a third-party sales and use tax software like Vertex or AvaTax, verify if your license includes exemption certificate management. Many of the exemption certificate management software packages can also be licensed as a stand-alone solution.

Your comments and/or questions are welcome - and appreciated. See contact options below.

Joni Johnson-Powe is the Founder and Principal of Taxnologi Solutions, LLC (“Taxnologi”). She has over 17 years of tax, accounting and consulting experience providing clients with tax compliance and consulting services including income, sales and use, VAT, property and unclaimed property tax services. And if you are considering tax technology, Joni has a specialized skill set in the tax automation arena including set-up, integration and configuration of software packages such as Vertex, OneSource, Avalara, Taxware, eProperty, and UPExchange.

Questions, Comments and/or Consultation Requests may be submitted directly to Joni - using the ORANGE "Request a Consultation" link on her Taxnologi Solutions FIRM PROFILE page.

Other recent “Sales Tax Automation & Software” posts by Joni Johnson-Powe, JD, CPA:

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