What is an exemption?

In some cases, buyers do not have to pay sales tax on goods or services that would otherwise be taxable, such as a contractor buying lumber to build a house. When applied to a transaction, an exemption reduces or removes the sales tax requirement.

What is an exemption certificate?

An exemption certificate is a document that proves the buyer's exempt status.

What are exemptions based on?

Use-based exemptions

These refer to the intended use of the item by the buyer. In other words, the item sold will be used in an exempt activity, such as being resold by a wholesaler.

Product-based exemptions

These refer to products that have been deemed non-taxable by the state. For example, in certain states, groceries or clothing are tax-exempt.

Organization- and individual-based exemptions

These refer to categories of organizations and individuals that may not be required to pay tax based on their activities or for public policy reasons.

Which organizations and individuals are tax-exempt?

The government

The federal government is exempt from state sales tax because of federal sovereignty, which dictates that the federal government's authority taxes priority over state powers of taxation.

Some state and local governments may also be tax-exempt, but it depends on the individual state.

Non-profit organizations

In some states, schools, churches, charities, and non-profit organizations can be tax-exempt.

Wholesalers

Wholesalers can be tax-exempt because they collect sales tax when they resell the product they purchased. Wholesalers must present a resale exemption certificate to the original seller to prove their tax-exempt status.

What are the seller's responsibilities regarding exemption certificates?

• Getting exemption certificates from customers before sales take place.
• Storing exemption certificates for existing customers.
• Making sure that exemption certificates obtained from customers are valid and up-to-date.
  • Check with the appropriate taxing authorities how to validate certificates in the states where you collect tax.
  • Exemption certificates may or may not have expiration dates, depending on the state. Expired certificates must be replaced with new ones or sales tax may be charged on future transactions.
• Making exemption certificates available in case of an audit.

What are some things I can do to effectively manage exemption certificates?

• Research what exemptions are valid under each state's law.
• Research the forms required to claim an exemption.
• Get valid exemption certificates from all your exempt customers before a sale is made.
• Have procedures in place for replacing expired certificates.
• File the correct exemption certificate in the correct format for the taxing jurisdiction.
• Create a process that allows you to safely store and readily access certificates if audited.