Taking advantage of sales and use tax exemptions can save your business money and headaches. But exemptions can be harder to secure in some states than in others.
In general, exemptions are statutory exceptions eliminating the need for the retailer or business to collect sales tax on a particular transaction or on all transactions with a customer. The presumption is that all sales of tangible personal property are taxable without specific and enumerated exemptions. Different than an exemption, exclusions are “excluded” from statute and are considered non-taxable. Services are generally excluded from statute and therefore non-taxable – although there are exceptions. Every state can apply for tax exclusions and exemptions as they see fit on goods and services within their state, but they aren’t required to. It is up to them how and what they exclude or exempt, or it may be a combination of the two.
Which can of course, make this another complicated piece of sales tax compliance.
Necessary paperwork for sales tax exemptions
To prove a sales tax exemption, the customer must provide an exemption certificate. The most common is a resale exemption certificate. This exemption certificate is a document that allows registered retailers to buy items for resale without paying sales tax on those items. The business (you) must then review the certificate for completeness and validity. The purchaser has the responsibility for determining whether a sale is exempt from tax. If the purchaser does not submit a valid exemption certificate to the business, the business must assess and collect sales tax. Without the exemption certificate, the state or jurisdiction in which you are registered will expect tax to be collected. So, while the burden does lie with the purchaser, you, the seller, will be expected to validate and cover the costs if they are incorrect. Depending on your situation there are times where you are the purchaser (example: purchase for resale) and other times in which you are the seller. Understand your obligations in each.
Certificates are generally state-specific unless the business has provided a multi-jurisdiction certificate covering the relevant states (there is no U.S.-wide certificate yet) and generally fall into two categories:
Use-based: Resale exemption certificates are the most common form of exemption certificate. As sales tax is charged at the point of final sale, goods and services bought for resale are often exempt to avoid double taxation.
Entity-based: Some entities that are not resellers of goods may also be exempt from sales tax. These can include certain charities, churches and religious organizations, education organizations, government/political organizations, trade organizations and others.
Why exemptions matter
Besides ensuring you are collecting and remitting the appropriate sales tax, exemptions are an important factor in determining whether you have economic nexus in certain states. Economic nexus requires remote sellers that may not have previously had a physical presence in a jurisdiction (like a state) to collect sales tax when they hit certain set thresholds in terms of either sales or number of transactions.
Depending on the state, some states will only consider taxable sales (exempt and non-taxable sales are not considered in these states) in determining whether you have reached their economic nexus thresholds while other states will consider total gross sales. (Take a look at our recent blog on this topic.)
Where it gets (even more) complicated
A glance at the number and variety of tax exemption forms for resale shows that some states might be simpler to deal with than others. Idaho and Pennsylvania, for instance, usually require one form. Texas offers nine different forms. Alabama, California, Connecticut, Georgia and New York offer a half-dozen or more.
In certain situations, more than two-thirds of states accept the resale/exemption certificates issued by other states. Connecticut, Florida (which recently passed economic nexus that will be enacted this summer) and Louisiana accept certificates depending on where the product was packaged and shipped.
As you consider exemptions, watch such states as Kansas and possibly Missouri, where new economic nexus rules look to kick in soon. Also keep an eye on Alaska, which has no statewide sales tax but where communities are banding together to establish nexus thresholds and require remote sellers to collect and remit local sales tax.
All of these nuances impact how and why an exemption certificate is utilized. And can make you pretty dizzy when trying to understand your sales tax implications when the majority of states have different laws. If your business may be impacted by changing sales tax conditions and requirements, you don’t have to go it alone. Contact TaxConnex. We can provide services to become your outsourced sales tax department.