Automating the Exemption Certificate Lifecycle

8/3/2019 Automating the Exemption Certificate Lifecycle

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AUTOMATINGTHE EXEMPTION

CERTIFICATE LIFECYCLE

Reduce non-taxed transaction audit risk, increase staf productiv-ity and improve the exempt customer purchase experience



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Prudent and proactive businesses are constantly investigating and implementing new

methods to reduce their sales and use tax audit liability and increase sta productivitysince 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 sig-nifcant revenue drops and higher demands or state services due to the slow economy,states are being very aggressive in their sales and use tax audits to help increase theirrevenues. Astute businesses have already, or are in the process o making moves toreduce their own sales and use tax liability risks to lessen the pain and dollar amounto an assessment.

The slow economy has shrunk top line growth or many companies causing them tolook to cost cutting to maintain or slow decreases in the bottom line. Once again, pro-active managers realize the importance o providing the tools their businesses need tobe more productive and to adopt sales and use tax best practices that urther reduce

costs and audit liability.

Businesses that are best prepared to handle this type o environment have implement-ed Exemption Certifcate Management (ECM) sotware to automate the collection andmanagement o certifcates and have integrated this sotware with their EnterpriseResource Planning (ERP)/billing and tax decision sotware to complete and automatethe “Exemption Certifcate Liecycle.”

Automating this process is not only critical or manuacturers, wholesalers and retail-ers, but also or businesses in any industry with sales tax exempt transactions, no mat-ter the sales channel. The most powerul ECM solutions can handle the collection andmanagement o certifcates in direct, retail, e-commerce, POS and tele-sales channelssimultaneously 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 certifcateprocesses and improve the exempt customer purchase experience.

“...in this world nothing is certain but death

and taxes.”

Benjamin Franklin

Introduction



Automating the Exemption Certifcate Liestyle

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Understanding theExemption Certifcate Liecycle

The Exemption Certifcate Liecycle is the recurring process

exemption certifcates go through rom their creation, to theirongoing use in uture transactions and audits, to their renewalwhen they expire or are classifed as invalid.

Figure 1

ECMSotware

Customer and transaction data

Tax decisions (rules and rates)

C u s t o

m e r

r e c o r d s

C e r t i f c a t e

d a t a

ERP/BillingSotware

Tax DecisionSotware

Sales and Invoice

origination

There are three primary components o the Exemption Certifcate Liecycle (Figure 1):ECM sotware, ERP or billing sotware and tax decision sotware. All three are criticalor minimizing non-taxed transaction audit exposure, increasing sta productivity andimproving the exempt customer purchase experience.

The Exemption Certifcate Liecycle consists o three primary steps initiated by a salesor invoice origination and certifcate request, but thereater, the cycle really never stops



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Initiation o certifcate process

The frst step begins with the customer and the ERP sotware because this is wheresales and invoices originate. When customers are exempt rom sales tax, statutorilythe seller needs to collect an exemption certifcate rom them. However, oten timescustomers do not know what documentation to provide and those taking the order donot have the certifcate expertise to know which documentation they need. In addi-tion, the certifcate collection process itsel can be time consuming because o the lacko knowledge on both sides or due to a lack o process on the seller’s side, resulting in apoor customer purchase experience.

Ensuring accurate collection

In the automated Exemption Certifcate Liecycle, these issues are solved with intel-ligent ECM sotware. Customer data is passed to the ECM sotware and requests or

certifcates are automatically sent to customers. Intelligent ECM sotware will track thestatus o requests and help ensure customers provide only valid certifcate inorma-tion or their transactions. Intelligent ECM sotware can retrieve and provide copies o certifcates to auditors.

In addition, ECM sotware serves as the “source o truth” or certifcates and will man-age certifcates, including tracking certifcate expirations and certifcates that havebeen deemed invalid. The management o all certifcate data plays a critical role inthe tax decision sotware.

Communication with tax decision sotware

The ERP sotware interacts with the tax decision sotware because it needs to knowwhat tax amount, i any, it needs to apply to invoices or customers. I the tax decision

sotware has accurate certifcate data, then customers who are exempt rom sales taxwill be billed correctly. I not, then not only will exempt customers be billed incorrectlybut the seller is also increasing its audit exposure and risk.




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Three sotware components are necessary or automating the ECM

liecycle: ECM sotware, tax decision sotware and ERP or billingsotware.

Exemption Certifcate Management Sotware

Generally, ECM sotware can be broken into two types: standard andintelligent. Exemption certifcate management can be perormedin-house or in many cases, outsourced. The workings and benefts othe Exemption Certifcate Liecycle apply in either case.

Standard ECM sotware

Is oten a desktop-based sotware—Desktop-based sotware requires installa-tion on the computers o the sta and usually requires routine maintenance to ensurethe latest version is installed, which may mean purchasing and installing additionalreleases o the sotware. It also means the sotware cannot be accessed rom anywhereother than your desk (no remote ofce access, no home access, no access when travel-ing and no direct access by auditor).

Digitally stores exemption certifcates — Certifcates are imaged, indexed andquickly located, eliminating paper and the need or fling cabinets to store certifcates.

Assists in the collection o exemption certifcates —In many cases standard ECMsotware displays which customers have been sent certifcate requests, the date sentand whether a certifcate has been received.

Provides reports to assist in the management o certifcates — Reports usuallyprovide details about customers and their certifcates and sometimes highlight sta productivity.

Intelligent ECM sotware will perorm the unctions o standard ECM sotware butincludes additional, powerul eatures and benefts that urther minimize non-taxedtransaction audit liability, increase sta productivity and improve the exempt customepurchase experience. Intelligent ECM sotware maximizes the benefts o automatingthe Exemption Certifcate Liecycle.

Document Management

Sotware is NOT ECM

Document management sotware centrallystores certifcates, but lacks the otherunctions o ECM sotware that are criticalto reduce non-taxed transaction auditexposure, increase sta productivity and

improve the exempt customer purchaseexperience—without disrupting worklow.

ECM sotware provides critical worklowenhancement or manuacturing,ecommerce, retail, wholesale and manyother channels o distribution.

Three Sotware Components Needed toAutomate the Exemption Certifcate Liecycle



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Intelligent ECM sotware

Is a Sotware as a Service (SaaS) solution — A web-based solution that mini-mizes installation cost and time since only an Internet connection is needed. Sotwaremaintenance is almost never an issue or a cost, since sotware updates are providedautomatically upon logging into the sotware. Sotware updates are usually includedin the licensing agreement.

Automates the process o collecting exemption certifcates — Customer re-cords can be automatically imported into ECM sotware with the system automaticallysending certifcate requests to customers.

Tracks the progress o collecting certifcates — Provides notifcations when yourcustomers have taken action on a certifcate request and sent back a completed

certifcate.

Helps to ensure the completeness o certifcates — Provides a mechanism tohelp ensure customers have flled in all required felds on the correct orm and havesent the orm back to the system.

Eliminates lost certifcates — A llows certifcates to be signed electronically andinstantly captured in the system. Web-based solution enables centralized, digital stor-age o certifcates.

Tracks certifcate expirations — Provides automatic determination o orm expira-tion based on rules or each orm. The expiration unction enables certifcate renewalrequests to be sent or certifcates beore or ater certifcates expire.

Provides ability to review certifcates — There are cases when certifcates sent bycustomers are not valid. A review unction enables these certifcates to be marked asinvalid and initiate a request sent to the customer or correction.

Automates the collection o certifcates that have expired or been markedas invalid — Provides ability to send electronic renewal requests or existing certif-cates that are about to expire, have expired or been marked as invalid.

Provides auditor tools — Enables ast access and viewing o requested certifcates toauditors.

Supports customer bill-to/ship-to and job hierarchies — Oten times a single

certifcate will apply to many company ship-to locations. Intelligent ECMs provide sup-port or these types o complex customer relationship hierarchies.

Integrates with ERP and tax decision sotware —Automates the export o certifcate data to tax decision sotware and the import o customer records rom ERPsotware. This trilateral process (the Exemption Certifcate Liecycle) ensures customershave valid certifcates and sales tax is billed only when required.

Critical Tool or Credit

and Sales Departments

Since intelligent ECM sotwareensures valid certifcates are collectedand tracks expirations, it eliminatesthe need or credit and salespersonnel to have additional trainingor expertise in exemption certifcates.




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Increases sta productivity — Gone are the days o Excel spreadsheets and mailmerges. Intelligent ECM sotware automates and streamlines most o the manualprocesses commonly associated with collecting and managing certifcates.

Supports all sales channels — Has the capability to lookup and collect certifcatesand share certifcate data in real-time or direct, retail, ecommerce and tele-sales saleschannels.

Improves the exempt customer experience — The automation o certifcateworklow and the Exemption Certifcate Liecycle enable non-taxed orders to be pro-cessed quickly. Built-in certifcate best practices eliminate the need or credit, sales orother departments to have exemption certifcate expertise when looking up or collect-

ing certifcates.

At a minimum, ECM sotware should provide your company an easy way to locate andcollect exemption certifcates rom your customers. However, using the increased lever-age provided by intelligent ECM sotware, your company can really begin to harnesstechnology to automate the Exemption Certifcate Liecycle to eliminate non-taxedtransaction audit risk, increase sta productivity and improve the exempt customerexperience.



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Tax Decision Sotware

It is beyond the scope o this white paper to go into the detailed unctions o tax deci-sion sotware. Instead, this paper will provide a brie overview o tax decision sotwareand why it is critical to receiving the maximum benefts rom automating the Exemp-tion Certifcate Liecycle.

In general, tax decision sotware determines the taxability and tax rate o a transac-tion based upon several actors in the transaction. Some o these actors include:

• the purchase order;• inormation about the product being sold;• the location o the purchaser and seller; and• any other actors that aect the taxability o the transaction.

Some common tax decision sotware vendors are AvaTax, Sabrix, Taxware and Vertex.

Taxability and audits — Once taxability and the tax rate are determined, thisinormation can be ed into an ERP so an invoice will relect the correct sales taxamount. Now your business can rest assure that the customer has been billed thecorrect sales tax amount and i audited, the auditor will simply throw up his handsand walk away unable to fnd any errors. Right?

In theory, this sounds great, but in practice, it is missing one critical piece to ensurethat the auditor is duly satisfed. How do we know that the correct tax decisionwas made by the tax decision sotware? Most o this determination is based uponinormation loaded into the sotware. I this inormation is aulty, then the taxdetermination could be aulty as well, and the auditor will have a reason to make anassessment.

Correct tax determination and exemption certifcates — One critical piece o inormation that will help ensure the tax determination is correct comes rom custom-ers’ exemption certifcates. For example, i there were an expired certifcate on fle ora customer, but this critical inormation did not get into the tax decision sotware in atimely manner, guess what? The tax decision sotware will assume the customer is ex-empt rom sales tax and no sales tax will be billed. Now, when the auditor looks at thistransaction, he is going to discover the certifcate was expired and that you improperlydid not collect sales tax on the transaction. This will lead to an assessment and thissingle error could be extrapolated into a large assessment.




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Even a Single Error Can Lead to

a Large Audit Assessement

“When perorming a dollar stratifedsample, a single error can be projected i the transaction is not extraordinary andrequency o occurrence can be proven.”

Texas Decision o the Comptrollero Public Accounts, Hearing No. 44,751

Integrating tax decision sotware and ECM prevents errors—Integrating tax

decision sotware with intelligent ECM sotware prevents this type o error and othercostly errors. Intelligent ECM sotware can be setup to automatically export certifcatedata into tax decision sotware at regular intervals, or on-demand as transactions areprocessed. In the above example, the tax decision sotware would have known thecustomer had an expired certifcate on record and tax inormation would have beencorrectly transerred to the billing sotware.

In addition to ECM and tax decision sotware, ERP/billing sotware is needed to applythe correct tax based on tax decision and ECM inormation.

ERP/Billing Sotware

As with tax decision sotware, it is beyond the scope o this white paper to go intothe complex details o ERP/billing sotware. Instead, it will explain why ERP/billingsotware makes up the last critical piece or automating the Exemption CertifcateLiecycle.

Typically, ERP/billing sotware is where most businesses store inormation about theircustomers. This inormation can be billing and shipping addresses, contacts, purchasehistory, open orders and more. When businesses acquire new customers or changes toexisting customers need to be made, those changes are entered into this sotware. Newcustomers and changes to existing customers are critical data pieces in ensuring theExemption Certifcate Liecycle is operating at maximum accuracy. Some large, com-mon ERP sotware makers are Intuit, Sage, Microsot, Intacct, Oracle and SAP.

For new exempt customers, you need to collect valid certifcates as quickly as possible

to ensure they are billed correctly and to speed the release o orders. Intelligent ECMsotware automatically imports customer records and sends certifcate requests tothese new customers ensuring up-to-date inormation on customers is available to theECM sotware or sending renewals and managing certifcate inormation.



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Figure 2.

Benefts o Automating theExemption Certifcate Liecycle

Minimized Non-TaxedTransaction Audit Risk

Centrally stored certifcates and ac-curate exempt billings

ensure minimized non-taxedtransaction audit risk.

Increased Sta Productivity Manual processes are automated, ree-

ing time and resourcesand reducing errors.

Improved Exempt CustomerPurchase Experience

Exempt orders processquickly with correct sale tax

amount on invoices.

Customer RecordsSchedule automatic customer recordimports into ECM sotware rom ERP/

billing sotware.

Collect CertifcatesECM sotware automatically requests

certifcates. Certifcates stored digitallyin central database.

Review CertifcatesSta determines certifcate validity.

ECM sotware tracks expirations.

Certifcate DataSchedule automatic certifcate dataexports into tax decision sotware.

Bill CustomerTax decision sotware accurately deter-

mines taxability.ERP/billing sotware invoices correct

sales tax amount.

Sales and Use Tax Audit

Accurate billing and certifcates ensureauditors fnd very ew discrepancies.

Figure 2 describes how the pieces o the Exemption Certifcate

Liecycle work together to ensure your company minimizes non-taxed transaction audit liability and maximizes sta productivity

as well as the exempt customer purchase experience.

Key Benefts o Automating the Exemption Certifcate Liecycle

Reduces Non-Taxed Audit Liability. Ensures exempt transactions are only pro-cessed i valid certifcates are on fle and enables you to prove it to an auditor.

Decreases Billing Errors. Tax decision sotware will know automatically whichcustomers are exempt rom sales tax and the ERP will bill the correct sales tax amountthereby reducing tax-only credit memos.

Automates and Accelerates Certifcate Collection. Certifcate requests or newcustomers and renewal requests or expired or invalid certifcates can be automaticallysent electronically.

Improves Collection o Valid Certifcates. Intelligent ECM helps to ensure validcertifcates are submitted by exempt customers.

Increases Productivity and Efciency. Eliminates paper, manual processes, salestax reunds and short-pays. Intelligent ECM eliminates the need or certifcate exper-tise in your credit and sales sta because it provides built-in best practices.

Supports Exempt Transactions in Shopping Carts and POS Systems.Intelligent ECM sotware can oten support the real-time lookup and collection o cer-tifcate in e-commerce applications and directly rom POS systems and then automati-cally transer the certifcate data to the tax decision sotware to make a tax decision—all without disrupting the purchase process.

Improves Management and Oversight o Billing Process. Connectivity o thethree systems improves visibility o the billing process and ensures policy changes aredata and reducing data entry errors.

Eliminates Manual Entry o Customer Data. When new customers are added, orexisting customer data is changed in the ERP system, this customer data is automati-cally transerred to the ECM, eliminating the need to maintain this inormation in two

places.

Displays Certifcate Inormation or a Customer Inside the ERP. Some ERPsotware have the ability to retrieve certifcate inormation rom ECM sotware and dis-play a list o certifcates a customer has on fle, the certifcate images and the status o certifcate requests, all inside the ERP, eliminating the need to go to the ECM sotwareto view this inormation.




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Every department in every company is asked or ways to contribute to cost savings or

productivity. Today, these calls are especially loud or any company dealing with tax ex-empt customers. In the current tough economic environment where state tax revenuesare plummeting, while demand or public services is rising, most states are aggressive-ly stepping up eorts to collect revenue and close these defcits. One method states areusing to increase revenues is to be much more aggressive with sales tax audits.

Proactive businesses are successully meeting this challenge by providing their depart-ments the tools necessary to dramatically reduce their sales tax liability and, in theprocess, signifcantly increase sta productivity.

These astute businesses have minimized their business’ sales tax liability becausethey have implemented Exemption Certifcate Management (ECM) sotware to auto-mate certifcate collection and improve the validity o certifcates submitted by cus-

tomers. Furthermore, they have gone a step urther to inoculate themselves againstsales tax assessments by integrating ECM sotware with their enterprise resourceplanning (ERP) or billing sotware and their tax decision sotware to automate theExemption Certifcate Liecycle.

The automation o the Exemption Certifcate Liecycle provides a number o key benefts:• Increased speed and automation o certifcate collection.• Improved validity o certifcates submitted by customers.• Decreased non-taxed transaction billing errors.• Reduced non-taxed transaction audit risk.• Reduced sta time and eort in preparing or and managing auditor requests.• Increased sta productivity by automating manual certifcate processes.

• Improved exempt customer purchase experience.• Elimination o manual entry o certifcate data into tax decision sotware and

customer data into ECM sotware.

To ully reap the benefts o the Exemption Certifcate Liecycle, businesses need ECMsotware capable o doing the job. AvaTax Certs is the only intelligent ECM sotwarethat fts this role. As the most powerul and capable ECM sotware available, AvaTaxCerts ully enables all the benefts o automating the Exemption Certifcate Liecycle.

Summary



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Based on Bainbridge Island, Washington, Avalara is transorming the sales and use tax

compliance process or businesses o all sizes. With point-and-click ease, Avalara pro-vides the astest, easiest, most accurate and aordable way or companies to addresstheir sales and use tax compliance. Avalara is the industry’s most trusted providero 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 flingand remitting more than $10 billion in taxcollections per year.

Avalara may have patents, patent applications, trademarks, copyrights, or other intellectualproperty rights governing the subject matter in this document. Except as expressly provided inany written license agreement rom Avalara, the urnishing o this document does not give youany license to these patents, trademarks, copyrights, or other intellectual property.

© 2011 Avalara, Inc. All rights reserved.

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Automating the Exemption Certificate Lifecycle

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