A South Dakota sales tax exemption makes it so specific categories of buyers and products aren't subject to state sales tax. The state taxes a wide range of services alongside physical goods and has narrower exemptions than many other states. If your business sells in South Dakota, it's important to understand which of your customers or products qualify for exemptions and to keep the documentation to prove exempt status if the state ever asks.

Below, we'll discuss who qualifies for an exemption, which products get exempted at the point of sale (POS), and what records a business needs to keep to defend an exempt sale during an audit.

Key takeaways

• South Dakota exempts specific buyers (e.g., resellers, nonprofit organisations) and products (e.g., agricultural inputs, prescription drugs) from sales tax, instead of offering broad exemption categories.

• An exemption certificate must match the buyer's legal status to the product or service being purchased. It's advisable for sellers to check the buyer's status periodically to confirm it hasn't changed and is still accurate.

• Businesses don't submit exemption certificates with their tax returns, but they must keep them on file for several years in case South Dakota audits an exempt sale.

What is a South Dakota sales tax exemption?

A sales tax exemption removes the requirement to collect South Dakota's sales tax on a specific transaction. South Dakota's state rate for retail sales of goods and services is 4.2%, and municipalities can add their own local rates on top of that.

Who qualifies for a South Dakota sales tax exemption?

Qualification depends on the buyer's legal status and how the purchase gets used. The South Dakota Department of Revenue defines which entities are exempt from paying sales tax on their purchases.

Here are some of the main entities:

• Government entities: Purchases by the federal government, the state government, and South Dakota municipalities, counties, and school districts are exempt. Tribal governments also qualify under specific jurisdictional conditions.

• Nonprofit organisations: South Dakota doesn't grant a blanket exemption to every nonprofit. Relief agencies, certain hospitals, and specific categories of nonprofit organisations qualify, but the exemption depends on the organisation's registered purpose rather than simply its federal tax-exempt status.

• Resellers: A business that's buying inventory it intends to resell doesn't pay sales tax on that purchase since the tax gets collected once from the end customer.

• Agricultural producers: Farmers and ranchers that buy inputs used directly to raise crops or livestock for sale can claim an exemption on those purchases.

What products qualify for a South Dakota sales tax exemption?

South Dakota doesn't exempt groceries as many states do, and it taxes a wide range of services alongside goods. Here are some of the main exemption categories:

• Agricultural inputs: Feed and chemicals used in producing agricultural products for sale are exempt, along with farm machinery and irrigation equipment used directly in that production. Fertiliser is exempt only when sold in quantities of 500 pounds or more, and seed (e.g., legumes, grasses, grains) is exempt only in quantities of 25 pounds or more. The exemption applies to the input itself, not to the buyer generally, so the same farmer would pay tax on a purchase unrelated to production.

• Prescription drugs: Prescription medications are exempt from state sales tax.

• Manufacturing equipment: Machinery and equipment used directly in manufacturing a product for sale can qualify for an exemption, provided it plays a direct role in production rather than a supporting one (e.g., office equipment, general facility upkeep).

• Isolated or occasional sales: A one-time sale by someone who isn't in the business of selling that type of good can fall outside the sales tax requirement, separate from the certificate-based exemptions above.

How do you apply a South Dakota sales tax exemption certificate?

The buyer completes a South Dakota exemption certificate, either the state's own form or the Streamlined Sales Tax Exemption Certificate, and gives it to the seller at or before the time of sale. The certificate identifies the buyer, states the reason for the exemption, and includes a signature that certifies the information is accurate.

Here are some details worth knowing:

• Timing matters: A certificate collected at the POS protects the seller if the exemption gets questioned later. One that's collected after the fact, such as during an audit, might carry more risk, even when the underlying exemption was valid all along.

• Blanket certificates cover repeat buyers: A reseller who buys from the same business regularly doesn't need to submit a new certificate for every transaction. A blanket certificate on file covers future purchases from that buyer until it's revoked or the relationship changes.

• The reason has to match the transaction: A resale certificate doesn't cover a business's purchase of equipment for its own use, even if that same business also buys inventory tax-free under the same account. Sellers that skip this check can end up with certificates on file that don't match what was purchased.

What records do businesses need to keep for South Dakota sales tax exemptions?

South Dakota doesn't require a business to submit exemption certificates when it files a sales tax return. But it must keep them available in case of an audit. Obtaining a completed, signed certificate for every exempt sale is the baseline, and South Dakota generally expects those records to be kept for three years. A missing or incomplete certificate that's discovered during an audit can turn an exempt sale into a taxable one, with the business made responsible for the uncollected tax plus interest.

Beyond keeping the certificate itself, you can do the following to maintain a clear paper trail:

• Match certificates to specific transactions: A certificate that sits in a file without a clear link to the invoice or order it applies to will be harder for you to defend during an audit, even when it's otherwise valid.

• Review buyer status periodically: Resale certificates don't typically expire on a fixed schedule in South Dakota, but a buyer's exempt status can change. For example, a nonprofit can lose its qualifying purpose or a reseller can shut down. Periodic reviews can help you catch these issues before they become problems.

• Separate exempt and taxable sales in your records: If your business sells both taxable and exempt products to the same customer, you need records that show which line items were taxed and which weren't.

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FAQs about South Dakota sales tax exemptions