Though customers can claim sales tax exemptions for several reasons, all types of customer or usage-based sales tax exemptions require accurate documentation. Correctly identifying which transactions are exempt is essential for businesses to maintain accurate billing and ensure they are only collecting tax when legally required.

Below, we explain the different types of sales tax exemptions and the common scenarios where they apply. However, note that this is general sales tax information, and you should consult a tax expert for advice specific to your business.

What’s in this article?

• What are sales and use tax exemptions?
  
• What are the types of US sales tax exemptions?
  
• Sales tax exemptions for organizations and entities
  
• Sales tax exemptions per categories
  
• Sales tax exemptions per state
  
• Managing sales and use tax exemptions
  
• How Stripe Tax can help
  

What are sales and use tax exemptions?

Sales and use tax exemptions are criteria that prevent a customer from paying sales tax for a particular transaction. Customers can be eligible for an exemption for a variety of reasons, including:

• Retailers buying items they intend to resell: Sales tax is considered a consumption or use tax, which is paid for by whoever consumes or uses the product. When a retailer buys an item to resell, the retailer is not the user of that product. The retailer is not required to pay sales tax when purchasing items for resale because whoever consumes the product will pay sales tax when they purchase the product.
  
• Charitable organizations or government agencies: Certain nonprofits are exempt from paying sales tax, but the list of exempt charitable organizations varies by state. Additionally, sales to the US government are almost always exempt from sales tax, and certain states will exempt organizations such as state-run schools or other government entities from sales tax.
  
• Manufacturers buying materials to be used to create a final product: Similar to items purchased for resale, manufacturers are also eligible to claim a sales tax exemption if the manufacturer is using the items to create other goods or products for resale.
  

However, note that this list is not inclusive of all sales tax exemptions, and you should consult a tax expert for advice specific to your business.

What are the types of US sales tax exemptions?

Sales tax exemptions can be broadly divided into the following categories:

• Buyer exemptions: Certain entities, such as government agencies and qualified nonprofits, are legally exempt from paying sales tax regardless of what is being purchased.
  
• Product exemptions: These are granted because of the type of item being sold. Many states choose not to tax “essential” commodities, such as groceries, to reduce the tax burden on necessary cost-of-living items for all consumers.
  
• Usage exemptions: This category is based on the intended use for the product. The most common example is the Resale Exemption, where a retailer buys inventory tax-free because the tax will eventually be collected from the end consumer
  

Sales tax exemptions for organizations and entities

Specific organizations are often granted sales tax exempt status for one reason or another:

• Government agencies: Under federal law, the US federal government and its various agencies are always exempt from state sales tax. Most states also extend this exemption to their own state and local government offices, public schools, and libraries.

• Nonprofit organizations: Most charitable, religious, and educational organizations are exempt from paying sales tax on purchases that further their mission. However, organizations must typically apply for a state-specific certificate.

• Resellers and wholesalers: Businesses that purchase goods for the sole purpose of reselling them, either in their current form or as part of a new product, do not pay sales tax on those inputs.

Sales tax exemptions per categories

States often exempt specific categories of goods and services to encourage certain behaviors or reduce tax burden for certain populations.

• Groceries and food: Most states exempt unprepared food or groceries purchased for home consumption. However, prepared meals at restaurants are almost always taxable.
  
• Medical products: Prescription drugs are exempt in nearly every state. Many states also exempt “essential” medical devices like prosthetics, oxygen tanks, and mobility aids.
  
• Clothing: A handful of states, such as Pennsylvania and New Jersey, exempt clothing entirely. Others only exempt clothing below a certain price threshold.
  
• Services and digital goods: Many states still primarily tax “tangible personal property.” Consequently, services like accounting or digital-only goods are exempt in some jurisdictions but increasingly taxed in others as states update their digital laws.
  

Sales tax exemptions per state

Sales tax is managed at the state level, leading to significant geographical variations. For example:

• States with no sales tax: New Hampshire, Oregon, Montana, Alaska, and Delaware do not have statewide sales tax, essentially making all purchases sales tax exempt.
  
• Sales tax exemption outliers: Illinois is one of the few US states that tax prescription medication at a 1% sales tax rate. Alabama and Mississippi, meanwhile, apply a full sales tax to grocery items.
  
• Industry-specific exemptions: California offers a number of partial exemptions for equipment used in specific industries, such as manufacturing or research and development. Ohio and Texas also offer more broad exemptions on machinery and equipment sales to encourage manufacturing.
  

Managing sales and use tax exemptions

To successfully navigate sales tax exemptions, businesses must master the documentation process, whether they are claiming an exemption or receiving one from a customer. A sales and use tax exemption certificate is a form presented by a business or organization that is exempt from paying sales tax on certain purchases. Each type of sales tax exemption requires different documentation.

Additionally, each state has its own sales and use tax certificates, so if your business needs to claim a sales tax exemption in multiple states, you might have to get a sales tax exemption certificate in each state where you make tax-exempt purchases. Certain states will accept out-of-state exemption certificates, but not all states do.

If you receive an exemption certificate from a customer, you should review it carefully to confirm the items should be tax-exempt. You should verify the customers’ state registration details, monitor for fraudulent transactions, and keep a copy of the certificate for your records.

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 API.

Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US and manage filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, VAT, and 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 your business is in the US, let Stripe manage your tax registrations, and benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations. If you’re located outside 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 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.