A Texas sales tax exemption removes the state’s 6.25% tax and whatever local rate applies from a specific transaction. The exemption depends on who’s buying (e.g., a government entity, a resale purchaser), what the item is, or how it gets used. Texas separates these sales tax exemptions into two categories: those that apply automatically and those that require a certificate at the point of sale.

Below, we’ll cover who qualifies for an exemption, which products and services are exempt, and what records a business must keep to support an exempt sale during an audit.

Key takeaways

• Eligibility for a Texas sales tax exemption depends on the customer’s status or the item’s use. Confusing the two categories is a common source of errors.

• Sellers need a completed exemption certificate on file for exempt sales based on the customer’s status. If that’s missing, the Texas comptroller can hold the seller liable for uncollected tax.

• Tax software can apply exemption status automatically to future transactions once a customer’s exemption reason is stored on their record.

What is a Texas sales tax exemption?

A Texas sales tax exemption removes the sales tax that normally applies to the purchase of most goods and some services. The reason for an exemption depends on one of three factors: who’s buying, what the item is, or how the item gets used.

Who qualifies for a Texas sales tax exemption?

Eligibility for sales tax exemption in Texas often depends on who’s buying. Five categories cover most of the exempt purchasers you can encounter:

• Government entities: Federal agencies, the State of Texas, and local Texas governments such as cities, counties, and school districts don’t pay sales tax on purchases made for their own use.

• Nonprofits: Religious, educational, and charitable organizations qualify only after they’ve applied for and received exempt status from the comptroller. A federal 501(c)(3) letter alone doesn’t exempt a nonprofit from Texas sales tax.

• Resale purchasers: A business holding a Texas sales tax permit that buys goods to resell rather than to use or consume doesn’t owe tax on that purchase. The tax gets collected from the end customer.

• Manufacturers: Businesses buying machinery, equipment, or certain consumables used directly in producing tangible personal property for sale can qualify for a manufacturing exemption.

• Farmers and ranchers: Agricultural producers need a comptroller-issued Agriculture and Timber registration number, obtained through Form AP-228, before they can claim exemptions on farm and timber purchases.

What products and services qualify for a Texas sales tax exemption?

Some exemptions attach to the product no matter who’s buying it. Groceries for home consumption are exempt, although prepared food, soft drinks, and candy stay taxable even when sold in a grocery store aisle.

Other exempt products include:

• Prescription drugs

• Most over-the-counter medications

• Certain prosthetic devices and durable medical equipment

• Water sold for residential use

• Newspapers and some periodicals

Other exemptions depend on the item and how it’s used:

• Manufacturing equipment: Machinery and equipment used directly in the manufacturing, processing, or fabrication of a product for sale can qualify, but equipment used for administrative or preproduction work typically can’t.

• Agricultural inputs: Feed, seed, fertilizer, and farm machinery purchased by someone holding a valid Agriculture and Timber number are exempt from tax at the point of sale.

• Data processing services: Only 80% of the charge on these services is taxable. The remaining 20% is exempt by statute.

How do businesses apply for a Texas sales tax exemption certificate?

The core document for a Texas sales tax exemption is Form 01-339, the Texas Sales and Use Tax Exemption Certification. Part 1 works as a resale certificate. Part 2 covers other exemption categories, such as nonprofit or agricultural use. The customer fills out the relevant section and gives it to the seller at or before the sale. The form needs the purchaser’s name and address, a description of what’s being bought, the reason for the exemption, and a signature.

A sales tax permit number goes on the resale side of the form, while an Agriculture and Timber number goes wherever an agricultural exemption applies. Sellers keep the certificate on file as proof that a sale was legitimately tax-free.

A customer purchasing from the same seller regularly can issue one blanket certificate that covers future purchases of the same type, which saves both sides from filling out or collecting a new form for every order. However, Agriculture and Timber numbers aren’t permanent: the comptroller reissues them on a renewal cycle. A business caught using an expired number is treated the same as one with no exemption on file.

What records must businesses keep for Texas sales tax exemption claims?

Texas requires businesses to keep sales and use tax records for at least four years from the date the tax was due or paid. Exemption claims require holding on to the certificate, not just a note that one came in.

A seller should keep three things on file for each exempt sale:

• The completed certificate, signed and filled out in full

• Invoices or receipts tied to the sale that match the description on the certificate

• The customer’s permit or Agriculture and Timber number

A certificate accepted in good faith and complete on its face typically holds up during an audit.

What happens if a business misapplies a Texas sales tax exemption?

If a seller doesn’t have a valid certificate on file for an exempt sale, the comptroller can assess the uncollected tax against the seller during an audit plus penalties and interest depending on how late the payment lands. That’s true even when the customer genuinely qualified.

A seller who accepts a certificate that’s complete and reasonable on its face isn’t expected to investigate whether the customer is telling the truth about how the item will be used. If a customer claims an exemption they weren’t entitled to, that liability shifts toward the customer. Knowingly issuing a false certificate is treated as tax fraud, and that can carry criminal penalties on top of the back taxes owed.

How can businesses evaluate their Texas sales tax exemption process?

Businesses that sell in volume to nonprofits, government customers, resellers, or agricultural customers tend to hit the same failure points repeatedly. Common flaws in exemption processes include certificates collected once and never checked for completeness, Agriculture and Timber numbers that expired without anyone catching the issue, or exempt status applied at checkout without the correct documentation to back it up.

Automated tools can close many of these gaps. Stripe Tax lets a business mark a customer as tax exempt and store the reason alongside that customer’s record so the exemption applies automatically to future invoices instead of getting reentered manually every time.

What matters at the process level is having a strong system, whether that’s Stripe Tax or a manual filing structure. Every exempt sale must have a certificate attached before the sale closes. Those certificates must be checked for completeness (a signature, permit number, and clear exemption reason) at intake. Agriculture and Timber numbers need to be regularly updated as they’re renewed. And businesses must keep records for at least four years after the transaction.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful application programming interface (API).

Stripe Tax helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US, automate US filings in the Dashboard, and manage global filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, value-added tax (VAT), and goods and services tax (GST) on:

• Digital goods and services in all US states and over 100 countries
  
• Physical goods in all US states and 42 countries
  

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: If you need to register for sales tax in the US, let Stripe manage your tax registrations. You’ll benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax automates US filings in the Dashboard, powered by TaxJar. For global filings, Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.

FAQs about Texas sales tax exemptions