What is a sales tax exemption?

Sales and use tax nexus is defined as a connection between a person or entity and a taxing jurisdiction.  Sales tax nexus is the basis for all your sales tax decisions because without sales tax nexus you have no further obligation to a state.

If you determine your products/services are taxable and you have nexus, then you must register, begin charging and collecting sales tax and file and remit returns to all the states and jurisdictions in which you have nexus.  That is unless an exemption applies. 

An exemption is an exception that eliminates the need to charge and collect sales tax on an otherwise taxable transaction. Certain products and services may be non-taxable and not require an exemption certificate.   

The presumption is that the sale of tangible personal property is generally taxable unless specifically enumerated while services are generally non-taxable unless specifically enumerated.  There are many exceptions to these “general” rules. As an example, food items are often considered non-taxable in many states.  Similarly, Software-as-a-Service is non-taxable in a variety of states.  

An exemption certificate is not needed to exclude the sales tax from a nontaxable item.  In the case of an otherwise taxable transaction, the purchaser has the responsibility for determining whether a sale is exempt from sales tax and submitting a valid exemption certificate to the seller. If the purchaser does not submit a valid exemption certificate to the seller, the seller must assess and collect the sales tax from the purchaser.  

The responsibility to determine the validity of the exemption certificate resides with the seller. Without this exemption certificate, the state or jurisdiction in which you are registered will expect you to have collected sales tax. 

 There are many types of exemptions that could apply, but they often fit into two 6 main categories:  

1. RESALE EXEMPTIONS If you are selling products to distributors who will resell the product, the distributor is the one who needs to provide the resale exemption certificate to the seller to substantiate the exemption. You will need to secure a resale certificate from these distributors in order to not have the obligation to charge sales tax. The responsibility is also on you to validate that the correct information is on the certificate and that it is accurate. A simple example of a resale transaction would be a big box retailer that buys products from a vendor and then sells these products to the end consumer. The big box retailer does not pay sales tax when they purchase the product from their vendor (provided they supply a valid resale exemption certificate), but they do charge the sales tax to the consumer when the end-consumer makes the purchase. 
2. CUSTOMER EXEMPTIONS Specific types of customers are exempt from paying sales tax on their purchases. Depending on the state, these may include government entities, non-profits, and schools, to name a few. It is the buyers’ responsibility to provide their exemption certificates in order to not be charged sales tax, and sellers need to keep documentation of these exemptions on file. 

Exemption certificates come in a lot of varieties:  

• A Uniform Sales and Use Tax Certificate can be used for resale exemptions in many states, with some limitations;
• Streamlined sales tax form. Good in states that participate in the Streamlined Sales Tax project;
• A state-specific resale certificate and state-issued exemption certificates;
• A manufacturer’s certificate;
• A nonprofit certificate. 

Once you know what an exemption to sales tax is you also need to understand the importance of validating them (or having them validated), how to obtain one and understand how to set up a process to manage your exemption certificates. For more information on these topics, download our Need-to-Know Guide on Exemption Certificates.  

If you’re tired of trying to keep up with all your sales tax obligations and the differing rules related to managing sales tax, then let an expert handle it for you! With TaxConnex, sales tax is all on us. Get in touch to learn more!