Best Practices for Managing Licenses in Excise Tax

Managing licenses in excise tax is a legal requirement for businesses producing, distributing, and selling excise-taxable products like tobacco and motor fuel.

A lot goes into managing licenses effectively, like obtaining, verifying, and regularly maintaining the licenses. This is a time-consuming and error-prone endeavor if done manually. While this can get tedious, it is incredibly important to a company’s compliance and financial health. Below, we highlight some best practices for effectively verifying and managing licenses in excise tax.

Gather a copy of the customer or vendor license

When setting up a new customer or vendor, you should always gather their license information before doing business. This is important in indirect tax, especially in the motor fuel, tobacco, and vapor industry, since these businesses are subjected to stringent tax regulations.

Companies collect customer licenses to ensure their clients are legally authorized to purchase and deal with excisable goods. This promotes compliance with regulatory standards and helps verify customer eligibility for potential tax exemptions.

Here is some more in-depth knowledge on how to gather license information for excise vendors and clients.

Validate licenses before doing business & reporting

You should always, at the very least, validate customer licenses monthly before reporting. It is not uncommon for states to remove a license for various reasons, such as unintentional failure to renew or non-compliance.

Also, a noteworthy number of our tobacco clients have encountered instances of fraudulent certificates, wherein customers falsify licenses or certificates in hopes of doing business with a distributor. This emphasizes the importance of not assuming a license is active just because you have a copy. Ongoing validation is always necessary.

Validating excise tax licenses is crucial for the company’s financial well-being. If a client loses their license and it’s not promptly addressed, your company may very well find itself burdened with the responsibility of covering the associated costs. This might lead to an inability to recoup paid taxes and potentially incur additional interest for the sale of excise goods while possibly encountering penalties—an undesirable triple impact to the bottom line.

Automate your License Verification Process

We know validating licenses monthly can feel like a heavy lift. Even just one distributor could have you looking up 40+ licenses manually in multiple areas of the web. There are ways to streamline this time-consuming process with automation. 85% of business leaders believe that automating their workload will give them and their employees more time to focus on goals that truly matter to the company.

With license verification software, you can efficiently validate and source licenses and certifications with access to public and private databases that allow dynamic filtering to find what you need, faster. An automated system reduces risk and allows complete visibility into canceled, expired, mismatched, and new licenses. Thus gifting time back to your day to focus on high-level initiatives.

Create a license renewal process

Effective renewal strategies are crucial for maintaining compliance with excise tax licenses. Here are some tips to help boost your license renewal efficiency.

Establish a Renewal Calendar with Early Notification Capabilities

Create a comprehensive calendar that includes all relevant renewal dates for excise tax licenses. This calendar should be easily accessible to all key stakeholders. Also, implement an early notification system that alerts team members 90-120 before a license expires. You will want to reach out and allow adequate time for the clients or vendors to send their updated license information.

Utilize Technology Solutions

Leverage technology tools, such as license management software or compliance platforms, to automate renewal reminders and streamline the license renewal process. These tools can centralize information, reducing the risk of overlooking important expirations and deadlines.

Get The Inside Scoop

Put your networking hat on! Foster positive relationships with relevant jurisdictions in your industry. Establishing open lines of communication can be beneficial when seeking information about renewal processes, anticipating changes, or resolving any issues that may arise with license verification and renewals.

Establish a centralized system for licenses

Verifying licenses can be a nightmare when they are not organized properly or are scattered among various spreadsheets. Instead, implement a comprehensive digital repository where all license documentation is consolidated and easily accessible to stakeholders. This centralized data hub should be a one-stop location for license renewals, compliance records, and other essential documentation. This reduces the risk of overlooking expiring licenses and helps standardize compliance.

Be wary of business red flags

Keep an eye out for warning signs when it comes to company licenses. These may include businesses who:

• Consistently fail to comply
• Attempt to evade taxes
• Possess expired or invalid licenses
• Provide fraudulent license information
• Decline to provide updated license information

Avoid becoming entangled in their non-compliance, as it could adversely impact your business. It’s acceptable to make a business decision to discontinue dealings with clients who exhibit unethical or risky behavior.

Remember that if they struggle to meet their obligations to the government, they’ll likely face challenges in fulfilling their financial commitments, leaving you accumulating interest and taxes in the long term.

How license management can become a competitive advantage

Managing licenses in excise tax is not just essential for legal and compliance purposes, it can also be a competitive advantage when done effectively!

Reduce Friction on Customer Onboarding

When setting up a new customer during onboarding, they have to do quite a bit of paperwork. It is a competitive advantage if you get them set up accurately the first time, without credits and rebills. Effective license management builds trust and enhances the organization’s reputation, potentially attracting more customers and partners than competitors with a less robust compliance track record.

Strong Financial Performance

Companies lose  20%-30% of revenue every year due to inefficiencies, according to market research firm IDC. By managing and verifying your licenses effectively, you can reduce unexpected fines or legal expenses related to non-compliance and preserve financial resources, providing a competitive edge over companies that may face financial strain due to regulatory issues.

Risk Mitigation

Maintaining up-to-date licenses helps mitigate the risk of legal and financial consequences arising from operating with expired or invalid licenses. Being on top of license renewals and compliance requirements minimizes the risk of disruptions to business operations.

Operational Efficiency

Efficient license management streamlines processes related to excise tax reporting and payment. This, in turn, reduces the administrative burden and allows the business to allocate resources more effectively, contributing to overall operational efficiency.

License management in excise tax is not just a matter of compliance; it can be a strategic advantage that also allows companies to navigate the regulatory environment, reduce risks, operate efficiently, and build a positive reputation with their customers.

This analysis is intended for informational purposes only and is not tax advice.  For tax advice, consult your tax adviser. See the full disclaimer here.