Every state can apply tax exclusions on goods and services within their state. This means the good or service is non-taxable for all customers purchasing the item. However, there are further tax-exempt purchases. Tax exemptions can also be applied at the customer level as opposed to the product level.
Exemption certificates generally fall into two categories:
1. Use-based exemptions
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. Industries where use-based exemptions commonly exist are manufacturing, research & development and teleproduction.
2. Entity-based exemptions
Some entities that are not resellers of goods may also be exempt from sales tax. These include charities, churches and religious organizations, education organizations, government/political organizations, trade organizations, social welfare organizations and veteran’s organizations.
To prove sales tax exemption, the customer must provide a tax exemption certificate. It is than the business’ (you) obligation to review the certificate for completeness and validity (and be able to prove that you have applied due diligence in the process). Once a certificate has been accepted for a client/customer, it is not necessary to validate every transaction by the certificate holder. The certificate can be valid from 1 year to several years. However, it is important to implement a system to track the validity of exemption certificates.
Tax exemption certificates are generally state-specific unless the business has provided a multi-jurisdiction certificate covering the relevant states. There is as yet no US-wide exemption certificate; this means your systems must be able to handle both single and multi-state certificates.
For many businesses outsourcing sales tax can save them time and money. By outsourcing your compliance, you have a trust provider giving their expert knowledge to ensure all aspects of sales tax are managed correctly.
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- Check your business situation as regards origin and destination-based tax liabilities.
- Understand how location determination issues affect you and plan accordingly.
- Establish internal processes for handling tax exemption certificates.