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.

Though 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 you understand sales tax exemptions and certificates, including how to get a sales tax exemption certificate for your business. 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 is a sales and use tax exemption certificate?
  
• How do I get a sales and use tax exemption certificate?
  
• What do I do if I 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 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 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 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.

How do I 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. Though certain states will accept out-of-state exemption certificates, not all states do.

Before you set out to get an exemption certificate, you should review the qualifications for exemption in the state carefully to ensure your business is eligible. Be prepared to present documents outlining why your business is eligible for exemption. This could include documentation explaining your nonprofit status or other relevant business information regarding your intent to resell.

To get the right exemption certificate, you should consult the state’s taxing authority. If you intend to purchase items to resell, these types of certificates are often referred to as resale certificates. You can read instructions for getting a resale certificate in each state and instructions on obtaining other types of exemption certificates.

Once you have received your exemption certificate from the state, you’ll be required to present it to the seller to avoid paying sales tax. Certain states require exemption certificates to be renewed, so note expiration dates to ensure your exemption status is valid.

What do I do if I receive a sales and use tax exemption certificate?

If you receive an exemption certificate from a customer, you should review it carefully to confirm the items should be tax-exempt. Here’s what to do:

• Verify the customer’s state registration number and expiration date: Each state’s taxing authority will have a place for you to verify the exemption certificate number. Additionally, make sure the certificate isn’t expired.
  
• Determine whether the items would be sold in the normal course of the customer’s business: Be aware of any suspicious activity. If your customer indicates on their exemption certificate that they own a clothing store but they are trying to buy an unrelated item (e.g., carpet) from you tax-free, this is an indication the sale might be fraudulent.
  
• Keep a copy of the exemption certificate for your records: If you get audited, you’ll need this information to prove you weren’t required to charge sales tax on this sale.