With social distancing guidelines in place around the globe, there has been much talk about the impact on consumer-facing businesses and the need to bring their businesses online. Similarly, B2B sellers have also experienced rapid change in recent weeks as many of them have scrambled to bring their operations fully online or make other adjustments to cope with business during stay-at-home orders resulting from the new coronavirus and the disease it causes, COVID-19. One trouble area for B2B sellers during this transition has been and will continue to be the process of managing tax exemptions in a world that has gone virtual in nearly every way.
Document all tax-exempt sales accurately regardless of the sales channel.
While the process of managing tax exemptions hasn’t changed due to COVID-19, the pandemic has significantly impacted the way businesses collect and manage exemption certificates. For example, businesses have historically assigned one or more employees to manually verify exemptions that customers submit through in-store and online channels. This manual process is time-consuming, which makes it less than ideal for a fully online operation. That’s why it’s now more important than ever before that businesses use an automated solution that allows customers to input exemption information online lets merchants process and manage it digitally.
Without automation, sellers are putting themselves at risk during the age of social distancing in several ways, including:
● Audit risks
Following the South Dakota v. Wayfair Supreme Court decision in 2018, registration requirements for tax-exempt businesses skyrocketed due to new economic nexus laws. Fast forward to today with the recent shift to primarily online shopping, and you’ll likely find that those requirements have increased even more.
Because of the rapid nature of these changes in the midst of the COVID-19 pandemic, businesses have had less time to adapt their online systems to facilitate the digital documentation of exemption certificates. Consequently, in an effort to salvage as many sales as possible, sellers are likely inclined to withhold charging tax despite not having proper documentation. Not only does this approach put businesses at significant risk of getting audited in the short-term, but these businesses could be on the hook for up to four years or more.
Automated solutions enable businesses to have an audit plan in place by ensuring that buyers can easily input their exemption information online. They also allow businesses to more effectively manage and store exemption certificates across channels so that buyers do not have to input the information multiple times, and all tax-exempt sales are accurately documented regardless of the sales channel.
● Omnichannel challenges
Regardless of the channel that you are selling through, a business is responsible for the collection of exemption certificates for sales that do not charge tax. The process was much easier to manage when ecommerce sites for B2B transactions were virtually nonexistent. But as digital B2B selling has gained traction, the challenge of collecting and managing exemption certificates across channels has become increasingly more burdensome for sellers.
Prior to COVID-19 and the rapid shift to online, many businesses were accepting digital B2B transactions. However, despite their ability to sell across numerous channels, many have continued to manually handle the exemption certificate management process for in-store and online orders. But now that the number of online sales has increased, businesses that are still manually managing this exemption process are also increasing their compliance risk.
Because of the error-prone nature of manual compliance, the added risk of error puts businesses in a situation where they likely have even more liability in the event of an audit. This is why automated solutions to manage exemptions across channels have become even more critical in the age of social distancing to manage the tax-exempt sales happening today and to future-proof the business for future liabilities.
● Supply chain risks
Exemption certificate management has a significant impact on two of the main supply chain flows: product and financial.
On the product side of the supply chain, a seller may withhold delivery of a product when it doesn’t receive proper exemption documentation on time. It is fair to assume that a seller receives, reviews and evaluates credit applications, financial information and exemption certificates before it delivers product. So, if an exemption certificate is missing because a business is unable to manage documentation digitally, the supply chain could come to a stop.
The financial supply chain is at risk when a seller expects payment for an invoice of products that it has delivered. If the buyer is tax-exempt, they could either short pay the invoice or ask that the seller create a new invoice and possibly restart net payment terms. In both cases, the seller is out of cash for non-payment. Businesses can avoid these scenarios by allowing technology to collect exemption certificates at the appropriate time to help increase cash flow and reduce risk.
More and more online sales
Social distancing and stay-at-home orders have likely forever changed how consumers and companies conduct business. From meetings to shopping, society has learned that more can be done online than we have ever let ourselves believe before. As a result, B2B sellers should anticipate that online sales will become more of the norm and that customer preferences will no longer be the same as they were before.
Moving forward, businesses will need to ensure that they have the technology in place to not only manage tax calculations for online sales, but also enable tax-exempt buyers to manage their exemption certificate declarations online. Failure to digitize the exemption certificate management process will not only deter buyers but will also place businesses at an elevated compliance risk due to the mismanagement of exemption certificates.
Silvia Aguirre is vice president of certificate management at Avalara Inc., a provider of tax management software.