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Exemption Certificate Support Services
Indirect Tax
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2 | Exemption Certificate Support Services
Recent economic difficulties faced by states have resulted with many of the current state and local tax audit programs to focus much more on “sales side” audits, regularly requiring companies to produce exemption certificates during the audit process. Because most of these audits are performed using statistical sampling techniques, the failure to locate an exemption certificate or producing an invalid certificate can be very costly. Maintaining and updating exemption certificates, which can often be in the thousands, can put a huge strain on already overloaded company resources. There are practical challenges, technical challenges, and internal control considerations that companies need to consider regarding exemption certificates:
Technical Challenges:
• Today’s exemption certificate process is manually driven
• In many companies, there is no system in place to adequately capture and centralize the exemption certificate data
• The tax department is generally remote from the exemption management process in a decentralized environment
Internal Control Considerations: • The failure to design and implement
a process to address exemption certificate management issues could result in a control deficiency
Enhance the management of your indirect tax compliance obligations
According to the 2007–2008 Annual Report of the California Board of Equalization, “Unsupported sales for resale was the second most costly and frequently occurring category of taxpayer noncompliance. More than one in ten taxpayer errors occurred in that category. This area of noncompliance made up over 22% of net sales and use tax audit deficiencies (less refunds), totaling more than $65 million in unpaid tax.”
The most important thing is to get a system in place that allows you access to the certificates at a central location. The certificates really don’t do you any good locked up in some filing cabinet at some plant that is nowhere near the tax department..
Leah Durner, State and Local Tax principal at KPMG, Sales & Use Tax Monitor, “System to Track Exemption Certificates Becomes More Essential”, June 30, 2010.
““
Practical Challenges: • Sales tax audits are increasingly
more aggressive
• The seller, not the customer, bears the burden of proof for exempt sales transactions
• States are narrowing or eliminating sales tax exemptions
• Due to jurisdictional and industry-specific requirements, over 300 different exemption forms exist
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In your most recent audit, what issues did you find related to exemption certificates?:
Poll Results*
35%
11%6%
25%
23%
Legend (n=512)
� Missing certificates (178)
� Incomplete certificates (55)
� Certificates not collected in a timely manner or in good faith (32)
� No issues identified (127)
� Don’t know (120)
If you were recently audited, approximately what percentage of your assessments were due to a lack of certificates?
Poll Results*
36%
7%6%6%
45%
Legend (n=546)
� Less than 5% (196)
� 5% to 15% (41)
� 15% to 25% (31)
� Greater than 25% (33)
� Don’t know (245)
How do you currently manage and maintain your tax exemption certificates?
Poll Results*
2%
61%21%
10%
6%
Legend (n=578)
� Manually (354)
� Utilize proprietary software (38)
� Utilize third-party software (55)
� Outsource the entire function (11)
� Don’t know or don’t currently have a system in place (120)
Please rate the effectiveness of your current tax exemption certificate system.
Poll Results*
3%
36%
15%
24%
22%
Legend (n=567)
� Excellent (18)
� Above Average (87)
� Average (201)
� Below average/in need of improvement (135)
� Don’t know (126)
What would help your exemption certificate management efforts and assist with compliance?
Poll Results*
44%
21%
7%
28%
Legend (n=541)
� Add additional staff (114)
� Implement a software package to maintain certificates (241)
� Outsource the entire function (36)
� Nothing (150)
* Poll taken during KPMG TaxWatch Webcast, “An Explanation of Exemptions,” May 27, 2010.
Exemption Certificate Support Services | 3
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4 | Exemption Certificate Support Services
How Can KPMG Help?
Through our ECS services, KPMG LLP provides a cost-effective outsourcing alternative for collecting, organizing, and updating exemption certificates using our own internally developed Web-based software application to support our services. ECS can also help manage sales and transaction tax assessments and help improve your compliance and reporting procedures.
Our ProcessOur ECS process organizes critical customer and certificate data and is typically implemented in three phases—Certificate Collection and Organization, Certificate Review, and Ongoing Support.
Phase I – Certificate Collection and OrganizationIn Phase I, we collect, scan, and index, in electronic format, the certificates that you currently maintain on file. During Phase I, we:
• Meet with appropriate personnel at your company to review the policies and procedures that you use to obtain sales and use tax exemption certificates from your customers
• Collect, in electronic or paper format, qualifying copies of certificates currently on file
• Enter applicable information for each document into KPMG’s ECS software and assign to each document the customer number provided by you
• Prepare a report which lists and identifies the certificates or documents collected and stored during Phase I of the process
• Prepare an exception report which will identify certificates that may be potentially invalid because they are missing required information or they contain information in a format inconsistent with the required format of the applicable state or local taxing authority. For example, we will identify any certificate which lacks a state or local resale registration number or which contains a registration number that is not facially correct.
Phase II – Certificate ReviewIn Phase II, we assist in reviewing and attempting to remedy certain errors or omissions associated with existing exemption certificates. During Phase II, we:
• Prepare a letter to each customer who either has a certificate or document on file but was identified as potentially invalid or has been given a tax-exempt billing status but no exemption certificate is on file to support the tax-exempt status
• Review all of the responses received and update ECS with each customer’s updated or additional information
• Prepare a report which lists and identifies the certificates we update or supplement
• Prepare an exception report which will identify any certificates that may still be potentially invalid.
Benefits of KPMG’s ECS Technology
• ECS is a proprietary, Web-enabled platform
• Authorized client users have 24/7 access to their stored certificates
• Retrieval is fast, whether you are looking for 1 or 1,000 certificates
• Search functionality is diverse (e.g., you can search for certificates by state or by customer)
• The system can create client-defined forms or support documents
• The system is able to support exemptions from both the United States and Canada
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Exemption Certificate Support Services | 5
Phase III – Ongoing Exemption Certificate SupportKPMG will maintain the certificates and associated information within the ECS application, and update ECS with a new certificate or additional document information. As part of this phase, we:
• Work with personnel at your company to develop a process by which new certificates and customer data, along with the customer number and/or job number assigned to those certificates, will be forwarded to KPMG
• Enter into ECS all of the information on each new certificate.
Case Study: A nationally recognized sports equipment manufacturer and retailer engaged KPMG for Exemption Certificate Support (ECS) to assist with its internal and external tax-related audit support methodology. We were able to identify that the retailer had approximately 25 percent of its sales supported with valid exemption certificates. During the implementation, a state taxing authority performed a sales and use tax audit and assessed an audit liability for disallowed exempt sales.
As part of our ECS service, KPMG was engaged to assist the client to mitigate this liability by reviewing sales certificates and other sales-related supporting documentation secured by the client. Based upon the work performed, the audit liability for exempt sales was significantly reduced because a large percentage of its current sales was supported with valid exemption certificates that were stored electronically and accessible through KPMG’s ECS software.
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6 | Exemption Certificate Support Services
Why KPMG?
The partners and professionals who comprise our Indirect Tax practice understand the changing tax environment and turn knowledge into value for our clients. This begins with thinking beyond the present. That is, we anticipate the potential long- and short-term consequences of an action. In addition:
• We have a strong national network of professionals who work together beyond state borders
• We have a strong track record with assisting clients with their exemption certificate needs
• Our team has extensive, in-depth experience in all major industries
• We take a tailored approach to responding to your needs
• We can provide full outsourcing services
• We effectively use our technology resources to help streamline sales and transaction tax compliance
• Our State and Local Tax (SALT) practice is truly global and, through our ties with KPMG’s Global Indirect Tax practice, we team across borders to understand a client’s needs in the United States and abroad
• We have access to and consistently utilize KPMG’s State Tax Resource Network (STRN), which consists of over 90 of our top state and local tax professionals with specialized knowledge and strong working relationships with taxing authorities in each of the states
• We have access to and consistently utilize the SALT Washington National Tax group, which provides tax technical advice and keeps firm professionals and clients up-to-date on the latest state tax related news and developments from national and state legislatures, the IRS, Treasury, and other committees and policy-making entities.
Stay compliant, potentially eliminate penalties, and save time by keeping your exemption certificates organized and quickly accessible with KPMG’s Web-enabled Exemption Certificate Support Services.
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Exemption Certificate Support Services | 7
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Contact us
For more information on KPMG’s Exemption Certificate Support Services or our other Indirect Tax services, please contact:
Neeti DewanManaging Director, TaxPractice Leader – U.S. Indirect Tax ComplianceT: 770-240-8707E: [email protected]
Debbie LongManaging Director, TaxPractice Leader – Exemption Certificate ServiceT: 312-665-2765E: [email protected]
Robyn GomezAssociate Director, Client RelationsT: 925-334-2596E: [email protected]
kpmg.com
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Due to independence considerations, certain services may not be available to KPMG Audit clients.
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