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Exemption Certificates are Simple

If you focus on the “why” and not the “how”

Choose substance over forms

The exemption certificate process is over-complicated by the archaic nature of paper-based forms. The digital systems for buying and selling goods no longer support existing “high-touch” exemption protocols. To that end, we created a digital exemption cert platform that helps buyers document why they are entitled to reduced taxation. The process shouldn’t be about finding and completing the correct forms, it should be about quickly and accurately explaining why they shouldn’t pay the standard sales tax. While doing that, why not simultaneously automate tax determination and compliance for sellers? Exemption certificates are simple if you use tools that embrace the substance of each transaction.

Yes. Simple.

It’s highly unlikely you’ve read much about sales tax recently that included the word simple. Everything these days starts with some form of a warning: “due to the Wayfair decision and the economic nexus rules, your business is at risk!” Regarding exemption certificates, the same fears apply.

Consulting and software firms publish Tax Exemption Survival Guides that include “survival tactics”. Really? There’s no need to be an alarmist or intimidate potential customers. Remote, omnichannel sales are a great thing! Companies should collect exemption certs with the excitement of a teenager collecting merit badges on their way to Eagle Scout! To be excited about certs, you need to help buyers engage in a way that enhances the customer experience instead of the legacy processes that frustrate them. The best news is that these same improvements will simultaneously automate cert management for sellers.

The most important factor in managing exemptions is to avoid being swept up in fear while focusing on the substance of each transaction. The documentation and use of entitlements are almost always very obvious. It’s not overly complicated unless the process or the people involved are creating unnecessary complexity. To help keep things simple, let’s look at exemption management from the perspective of the two primary transaction participants: the buyer and the seller.

For buyers: relax, very little has changed

As we discussed previously, Wayfair didn’t change taxability, it changed the process. The items you were purchasing before Wayfair were taxable, but the seller often didn’t have a requirement to collect and remit the tax. That’s the change: Process.

As a result of that change in process, organizations and individuals need to claim exemptions more often because more sellers, in more locations, are required to withhold tax. The good news is that the same form used down the street is the one that you can use with remote sellers. That same form allows sellers globally to reduce or eliminate the tax from your invoice. It’s not complicated… the only change is that you now have to provide an exemption to sellers who historically didn’t charge anyone in your state sales tax.

One final hint for buyers: you rarely need a multi-state form. As we’ll address below, sellers often assume form simplicity delivers buyer efficiency, and nothing could be further from the truth.

For Sellers: focus on accuracy, not “standardization”

As a seller, you’re put in an unenviable position between the buyer and the tax authority that granted the exemption. What used to be an annoyance when dealing with a state or two has become aggravating. Being forced to reconcile remittance and compliance documents while accepting forms from across the country feels burdensome and potentially risky.

So how do you simplify the process?

Sellers are presented with the choice of focusing on each transaction individually or creating a consistent process. Real-time transactional evaluations require knowledge and understanding that are difficult and expensive to scale. Given the expansion since Wayfair, it’s unreasonable, if not impossible, to provide transaction-by-transaction support manually. As a result, companies gravitate towards consistency. They accept, review, reject and approve forms through a centralized function. Large organizations often outsource the management of certs or deliver them through an offshore scaled service environment.

To minimize error rates, service organizations look to minimize the number of processes they manage. Every form is a process, so fewer forms equals less to manage. Efficiency at its (theoretical) best.

The “simplified” form

For sales tax exemptions, there are two popular multi-jurisdictional forms: The Streamlined Sales Tax Governing Board cert (SST) and the Multi-State Tax Commission resale cert (MTC). There are 24 member states that accept the SST form as documentation for exemptions and 37 that accept the MTC cert. The logical assumption is that using two forms to cover the majority of the US simplifies the process… but does it?

The SST issued a revised form in December (2021). The form has been reduced from 2 pages to 1, with the major changes being an assumption that the certificate is a “blanket” and the coding of exemption type (that enabled the smaller footprint of section 5 which used to be page 2). It looks simple enough.

The New SST form — which reasons apply in your state(s)?

If you dig in a bit and look at the instructions for the form, you’ll see the following listed for purchasers.

  • Not all states allow all exemptions listed on the Streamlined Exemption Certificate.
  • An ID number may be required for each state in which you are claiming an exemption.
  • The purchaser must check with each state for exemption information and requirements.

As the buyer, you’re now in possession of a form to document your exemption, but the instructions require you to research if the exemption exists in your state and determine if you need an ID number. When buyers investigate the SST form on State sites, they’ll find that only one-quarter of the states accept all 13 exemption types listed on the form, with one state accepting only 7. Eight of the states don’t provide a “state-approved” version of the form, and several of the states still have the “old” version of the form on their sites.

In reality, the existence of a streamlined form doesn’t simplify the documentation of entitlements for the vast majority of buyers, it’s an accommodation for sellers that confuses the buyer. The internet is full of buyer questions that show their frustration, often “over complying” with states that have nothing to do with the transaction. There is rarely a need to document multiple state exemptions on one form between two legal entities, but buyers and sellers struggle to substantiate exemptions based on the transaction specifics with so many options available.

The SST as an organization enables some very powerful opportunities for sellers. Simplified registration across multiple states, certified low-cost tax software, and taxability synchronization are all important and worthwhile benefits, but the creation of a “standard” exemption form (given the differences between constituent states) fails to eliminate the complexity of accurately documenting exemptions, and increases the risks that sellers will fail to accurately capture the necessary information in support of a valid exemption.

Back to Basics

If the buyer has to research exemption entitlements on a state tax website or the internet, isn’t it easier for that individual to use the state-issued form instead of attempting to translate their research onto a multi-jurisdictional form? While a state-issued ST-3 or 31.014a may not look familiar to the seller, state-issued forms eliminate much of the complexity in documenting the exemption. If you need a specific ID number (i.e. it must be 8 characters starting with 75-), the form tells you. Maybe most importantly, if there isn’t a form in support of the buyers' expected exemption (like no agricultural production exemption in North Dakota… who knew?), then the seller doesn’t have to know that when reviewing the SST form. State-issued forms improve the process for everyone: buyers and sellers.

Focusing on why the exemption applies, and not on the forms used to document their applicability, simplifies everything about exemption certificates. If your existing processes don’t enable that perspective, and you’re not excited to collect more certs from remote locations in support of your growing business, then it’s time to consider alternatives to your document-centric focus.

Learn more about digital exemption certs at TAXDAI.COM



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Ron Giordano

Ron Giordano

Thirty years ago a macro and WYSIWIG in Lotus 1–2–3 started all this…