THE RELATIONSHIP BETWEEN CUSTOMER SERVICE AND EXEMPTION CERTIFICATE MANAGEMENT

How Poor Processes for Managing Exemption Certificates Creates Negative Customer Experiences

Introduction
Tax exempt transaction compliance is a much overlooked area of business that can damage or enhance the customers opinion of your company. When you dont manage your tax exempt customers properly, not only does your customer service suffer but you can also incur significant hidden costs.

We all know that customers are the sole reason why there are businesses and why businesses stay in business. This is why businesses are constantly searching for ways to improve service to customers, retain existing customers and thereby increase profits. Rightfully so, most businesses focus on the traditional areas like product mix, pricing, promotion and training. However, there is one area nearly all businesses overlook and that is the customer experience of sales tax exempt customers. To be exempt from sales tax, these customers must not only belong to a certain organization classification determined by taxing authorities, but are also required to have the proper documentation, called an exemption certificate, that proves they are exempt from paying sale tax. Sounds fairly simple. Unfortunately, it is anything but simple and a poor process for handling exempt customers can be a source of frustration for these customers and that can affect customer retention and eventually profits. It is complex due to the need to keep abreast of the hundreds of constantly changing exemptions in the hundreds of jurisdictions across the country. Inaccurately collecting and managing this exemption data by employees and within your internal systems (or not collecting it all) can have huge consequences downstream. Consequences can take the form of inaccurate billings, employees spending valuable time fixing errors like issuing tax refund checks or credits, poor customer service like held up orders, huge audit assessments and much more. This white paper will discuss how a poor process for managing exempt customers and exemption certificates impacts customer service, customer retention and profits and provides best practices for properly managing exemption certificates and creating a positive customer experience for your exempt customers.

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The Relationship Between Customer Service And Exemption Certificate Management

Untapped Ways to Improve Customer Service, Customer Retention and Profits

Ask a C-Level executive if increasing margins and improving operational efficiency are key company initiatives and youll receive a vigorous head nod. Talk about the importance of customer service on margins and costs and youre sure to keep his attention. Now that you have the executive actively engaged, ask if the way his company manages sales and use taxes negatively impacts customer service, customer retention and the bottom line and then watch his eyes glaze over. Why? Because for many companies, managing sales and use taxes is nothing more than an administrative burden. But, in reality, how you address this complex area of taxability has a direct impact on customer service, customer retention, and your bottom line, especially when you are managing your tax exempt customers. For many companies the percentage of gross revenue that comes from exempt sales can be significant. When you add up sales to schools, the government, religious institutions and more, the numbers are staggering. Even if you dont sell directly to exempt consumers, there are exempt sales to resellers, manufacturers, the agricultural industry and much more.
Create a competitive advantage with an exemption certificate management process. Managing exemption certificates and exemption data should not be treated as mundane administrative tasks. It is an untapped area for improving customer service.

A well-defined, effective exemption certificate management process can help your company improve its relationships with exempt customers. To get a quick eye-opening insight on how a poor process can negatively affect customers, go to a community forum for a large company and search for forum topics on sales tax and youll see many exempt customers complaining about their exempt sales tax experience.

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How Exemption Certificate Management Impacts Customer Service

Start with this premise - a happy customer is a loyal customer. Now, translate that to exemption certificates. When it comes to exemptions, what kind of conversation do you want to have with your customer? Have an effective exemption certificate management process and make the right taxability decisions at the right time consistently throughout your value chain and the discussion is easy and the customer is happy. Have an ineffective exemption certificate management process, make incorrect decisions and adjust after the fact, and the conversation is decidedly different. Why? Because incorrect decisions have a cascading effect on both you and your customers organizations. The path to fix the process and incorrect decisions can take many twists and turns. Just consider the following customer touch points related to certificates to grasp how their mismanagement can result in a poor customer experience and wasted time and money. Initial Certificate Collection Does sales/credit know which exemption certificates to collect and are they filled in completely? Is it usually done correctly the first time? Returning Customer Certificate Lookup Does Sales/Credit have quick access to accurate customer exemption Info? Tax Exempt Purchase Experience Is it quick and nearly error free? Are orders rarely held up? Billing/Invoicing Are they accurate? Is the issuance of refund checks/credits minimized? Are credit and re-bills to correct for tax errors rare occasions? Renewal Certificate Collection Do you keep track of certificate expirations? Is there timely collection of updated versions of expired certificates? Audits Do you rarely need to contact customers for missing certificates? If you answered No to even one of these questions, your company probably has customer service issues related to managing certificates. Failure to be efficient in all these areas can cause customer frustration and eventually loss of customers, in addition to all the extra time and money spent fixing problems caused by an inefficient exemption certificate management process in the first place.

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The Relationship Between Customer Service And Exemption Certificate Management

The Costs of Mismanaging Tax Exempt Customers

When you dont manage your tax exempt customers properly, not only does customer service suffer but you can also incur significant hidden costs. This double whammy goes straight to your bottom line, mostly driven by hidden costs found in duplicate efforts and inefficient processing. These can come in the form of operational expenditures to fix preventable problems, most of which fall outside of the tax department with credit, customer service, collections, accounts receivable and payable, sales and location/store managers.

QUICK FACT
Its difficult keeping current on exemption certificate changes. There are an average of 760 annual rule and rate changes in over 8,000 tax jurisdictions nationwide. Fortunately, there are best practices to mitigate this difficult task.

For example, it may require additional FTEs or temps to issue sales tax refunds for exempt purchases billed incorrectly. Or, your sales staff may be spending too much account management time helping customers fix sales tax billing errors, rather than using the time to generate new sales. Then there is the time and resources spent preparing for and managing an audit. Can you locate the certificates the auditor needs? Do you need to bother and frustrate your customers to reconstruct needed documentation to prove tax exemption? Lastly, have liabilities been accounted for, and if they have via reserves, what lost opportunity costs are associated with those funds? If only a better process for managing tax exempt customers were in place, the headaches, frustrations and costs on all sides could have been dramatically reduced.

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Drivers of Exemption Certificate Management Complexity

Why are such seemingly simple tasks of collecting and tracking exemption certificates throughout the value chain so complex? Because, like almost any other tasks, it is complex only if your company doesnt have a process in place to manage the complexity. Customer service, sales and credit on the front lines are typically the ones who collect exemption documentation. But unlike the tax department that deals with these issues every day, they dont have the knowledge to consistently make the right call. Compound that with the average 760 annual rule and rate changes in the over 8,000 tax jurisdictions nationwide and those front line employees cant possibly stay current. Escalating the complexity are process decisions for: 1. Collecting exemption certificates. 2. Storing collected exemption certificates (ensuring documentation doesnt get lost). 3. Locating exemption certificates when customers make a repeat purchases or during an audit. 4. Ensuring exemption certificate data is accurately stored in tax decision and billing software so customers are billed correctly. Tax department review of exemption certificates is yet another area adding to the complexity. Most often, the tax departments first view of the exemption certificates is when they are preparing for or actually in an audit. Should an audit reveal errors, it is that departments job to reconcile, verify and produce tax exemption certificates. If exemption certificates cannot be located, then customers will have to be contacted to collect them. Between penalties and interest incurred and reconciliation calls to customers, both customer service and your bottom line can take a hit as a result of mismanaging this complexity.

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The Relationship Between Customer Service And Exemption Certificate Management

Best Practices for Managing Exemption Certificates

Okay, it can be complicated. How can the complexity be managed? It all starts with a process that is consistently enforced throughout the organization. The process must be enforced. You can have a great process, but if no one within your company follows it, it is worthless. To begin creating an enforceable process, you must first thoroughly review your current policies and procedures regarding exempt customers. Map every process that happens as a result of an exempt transaction, whether handled correctly or incorrectly. Once you know exactly how you are handling things today, you can begin to identify areas for improvement. Make sure that the correct decisions are made at the point of transaction to eliminate or lessen the negative impacts downstream. Train front-line employees on the basics of exemption certificates and exempt sales. Most importantly, stay current with rules and rates. Next, investigate the benefits of using exemption certificate management (ECM) software. This type of software will enable your company to enforce the new process you have put in place. This software is designed to manage the complexity of exemption certificates and automatically keep current on changes to exemption certificates. Whats more, the software can be integrated with point-of-sale, ecommerce, tax decision and enterprise resource planning (ERP) or billing systems. By using a well-defined process and enforcing it with exemption certificate management software, exemption certificate management can be simplified while improving customer service, customer retention and profits. In the Appendix, there is a list of common exemption certificate management best practices (Figure 1), an exemption certificate validation checklist (Figure 2) and a process workflow for collecting, reviewing and updating billing systems (Figure 3).

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Summary
A commonly overlooked method to improve customer service, customer retention and profits is the process for collecting and managing exemption certificates and data from customers that are exempt from sales tax. Most companies have poor processes that are affecting customer retention and profits. Exemption certificate management may seem simple (just collect and store the exemption certificate) but is in fact complex. This is because there are hundreds of constantly changing exemptions in the thousands of jurisdictions across the country and this data must be tracked and managed by employees and internal systems. Mismanaging exemption data can negatively impact many areas of your business causing inaccurate billings, employees spending valuable time fixing errors, poor exempt customer experiences, huge audit assessments and many other problems. Although managing exemption certificates is complex, there are several best practices that can be employed inside a well-defined exemption certificate management process. A well-defined, enforced process will allow your company to improve customer service, customer retention and profits in an area most other companies ignore, providing your company a competitive advantage.

About Avalara

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 industrys 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. 2013 Avalara, Inc. All rights reserved. Avalara, AvaTax, Avalara Returns, CertCapture, TaxRates, TrustFile, BPObridge, Laserbridge+, Sales Taxll, Sales TaxPC, SalestaxPC+, StatetaxII, and StatetaxPC are either registered trademarks or trademarks of Avalara, Inc. in the United States or other countries. All other trademarks are property of their respective owners.

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The Relationship Between Customer Service And Exemption Certificate Management

Appendix

Exemption Certificate Management Best Practices

Figure 1. Exemption Certificate Management Best Practices

Overall Management
Software-as-a-Service (SaaS) Exemption Certificate Management (ECM) Software
Web-based software for collecting, storing and managing exemption certificates Accessible across company Increases compliance level significantly Integrates with point-of-sale, e-commerce, tax decision and billing software

Collection
Point of Purchase Basic sales tax training for customer-facing employees SaaS ECM software
Built-in exemption certificate rules provide needed tax expertise to customer-facing employees

Storage
Centralized and electronic
Easy to locate exemption certificates SaaS exemption certificate management software

Validation
Use checklist in figure 3 Review soon after collection of exemption certificates SaaS ECM software with review capabilities

Billing
Always charge tax if no valid exemption certificate is on file Enter exemption data on jurisdiction level into tax decision and billing systems
Update when necessary

SaaS ECM software and integrate with other internal systems

Maintenance
Track exemption certificate expirations
Collect new certificates prior to expiration

Track exemption certificate form changes

Update collection efforts with new forms when necessary

SaaS ECM software to automate maintenance

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Figure 2. Sales tax exemption certificate validity checklist

Sales Tax Exemption Certificate Validity Checklist

Certificate data must include, with very few exceptions:

Seller name/address Buyer name/address Completed, no blanks Name on certificate should match name on customer account Date Should be current, not several years old State of exemption State sales tax registration number Very few requirements to verify authenticity of registration number A few exemptions in a few states have exceptions to requiring a sales tax registration number on the certificate (agricultural, manufacturing and wholesalers). Customers who do not provide a registration number should include a statement as to why they are not providing one.

Type of exemption claimed Type of property purchased Normal course of business of the buyer (your customer) Signature of customer Some certificates require authorized signature of owner, partner or corporate office

Some certificates might include:

Single/blanket checkbox Title Printed name of signer

Other items to review:

Correct form No W-9s, sellers permits, registrations or license documents. Must be an actual state-approved certificate.

Completely filled out No blanks! Good Faith Have a familiarity with exemptions available in the state, exemptions available that can be reasonably performed with type of property purchased, customer business types to confirm good faith conditions. If the certificate has an expiration, is it still in its validity period (non-expired)? Method of payment Government and non-profit exemptions stipulate that the purchase must be directly paid for with organization/government funds.

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The Relationship Between Customer Service And Exemption Certificate Management

Cross-Functional Process
Figure 3. Best practice exemption certificate workflow

CUSTOMER SERVICE
Create New Customer Record

TAX DEPARTMENT

A/R

Short-pay check received on taxable invoice

YES

Is New Customer Exempt?

YES

Request an Exemption Certificate

Customer Exempt?

NO

NO

Code New Customer as Taxable in System

NO

Certificate Received?

Tax Collection Process

YES

Review & Validate Certificate

NO

Certificate Valid?

YES

Code New Customer as Exempt in System

Store, Maintain, Update & Access Certificates

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