In the US, sales and use tax exemption certificates are an important part of managing sales tax compliance. These certificates let certain customers and businesses claim a sales tax exemption and avoid paying sales tax on a particular transaction.

Although customers can claim sales tax exemptions for several reasons, all types of customer or usage-based sales tax exemptions require accurate documentation. Typically, these are referred to as sales and use tax exemption certificates, or resale certificates.

Below, we'll help businesses based in the US to understand sales tax exemptions and certificates, including how to get a sales tax exemption certificate. However, please note that this is general sales tax information. Businesses should consult a tax expert for tailored advice.

What's in this article?

• What are sales and use tax exemptions?
  
• What is a sales and use tax exemption certificate?
  
• How can businesses get a sales and use tax exemption certificate?
  
• What should businesses do if they receive a sales and use tax exemption certificate?
  

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 that they intend to resell: Sales tax is considered to be 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 organisations or government agencies: Certain non-profits are exempt from paying sales tax, but the list of exempt charitable organisations varies by US state. Additionally, sales to the US government are almost always exempt from sales tax and certain US states will exempt certain organisations from sales tax, such as state-run schools or other government entities.
  
• 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, please note that this list is not inclusive of all sales tax exemptions. Businesses should consult a tax expert for tailored advice.

What is a sales and use tax exemption certificate?

To claim a sales and use tax exemption, you must have proper documentation. An exemption certificate is a form presented by a business or organisation 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 a business needs to claim a sales tax exemption in multiple states, they may have to get a sales tax exemption certificate in each state where they make tax-exempt purchases.

How can businesses get a sales and use tax exemption certificate?

Typically, you must have an exemption certificate in each state where you want to claim a sales tax exemption. Although certain states will accept out-of-state exemption certificates, not all states do.

Before businesses set out to get an exemption certificate, they should review the qualifications for exemption in the particular US state carefully to ensure that the business is eligible. They should be prepared to present documents outlining why their business is eligible for exemption. This could include documentation explaining the business's non-profit status or other relevant business information regarding their intent to resell.

To get the right exemption certificate, businesses should consult the state's taxing authority. If they intend to purchase items to resell, these types of certificates are often referred to as resale certificates. For more information, instructions for getting a resale certificate in each US state and instructions on obtaining other types of exemption certificates are available.

Once a business has received its exemption certificate from the state, they'll be required to present it to the seller to avoid paying sales tax. Certain US states require exemption certificates to be renewed, so business should note down expiry dates to ensure that their exemption status is valid.

What should businesses do if they receive a sales and use tax exemption certificate?

If a business receives an exemption certificate from a customer, they should review it carefully to confirm the items that should be exempt from tax. Here's what to do:

• Businesses should verify the customer's state registration number and expiry date, and each US state's taxing authority will have a place where businesses can verify the exemption certificate number. Additionally, they should make sure that the certificate hasn't expired.
  
• Businesses should determine whether the items would be sold in the normal course of the customer's business, being aware of any suspicious activity. If the customer indicates on their exemption certificate that they own a clothing shop but they are trying to buy an unrelated item (e.g. carpet) from you tax-free, this is an indication that the sale may be fraudulent.
  
• Businesses should keep a copy of the exemption certificate for their records, as if they get audited, they'll need this information to prove that they weren't required to charge sales tax on this sale.
  

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.

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Learn more about Stripe Tax, or get started today.