Sales tax exemption certificates are documents used to validate that a purchase qualifies for a sales tax exemption under state regulations. These certificates serve as official proof from the customer to the seller that the transaction is not subject to sales tax because of certain qualifying conditions, which can include the nature of the purchaser or the intended use of the purchased goods.

For sellers, accepting a properly completed exemption certificate means they are shielded from the liability of collecting sales tax on that transaction. During audits, sellers can present these certificates as evidence to justify not charging sales tax. The customer and the seller must adhere to stringent state-specific guidelines regarding the issuance, acceptance, and storage of these certificates, and incorrect use or fraudulent claims related to exemption certificates can result in penalties.

Below, we’ll explain why you need exemption certificates and how they work from state to state.

What’s in this article?

• Why do you need exemption certificates?
  
• How states view exempt sales differently
  
• Choosing the right exemption certificate
  
• What counts as a complete sales tax exemption certificate?
  
• Who can use sales tax exemption certificates?
  
• Sales tax exemption certificate by state
  

Why do you need exemption certificates?

Businesses need sales tax exemption certificates to make tax-free purchases of goods or services that would ordinarily be subject to sales tax. These certificates are issued by state or local tax authorities and serve as proof that the purchaser is exempt from paying sales tax on specific items or transactions.

Here are reasons why businesses might need sales tax exemption certificates:

• To avoid paying sales tax on exempt purchases: Exemption certificates are typically obtained to avoid paying sales tax when making purchases that will be used for resale, manufacturing, or other exempt purposes.

• To comply with tax laws: In many jurisdictions, businesses are required to collect sales tax from their customers unless the customer provides a valid exemption certificate. If a business doesn’t collect sales tax when required, it might be liable for the unpaid taxes plus penalties and interest.

• To facilitate business transactions: Sales tax exemption certificates simplify the purchasing process by clearly identifying exempt purchasers to sellers. This helps avoid delays and disputes over sales tax collection.

• To qualify for customer-specific exemptions: Different types of businesses and organizations might be eligible for different sales tax exemptions. For example, nonprofits, government agencies, and certain types of businesses might be exempt from paying sales tax on specific purchases.

How states view exempt sales differently

States across the US have different regulations and views on what constitutes an exempt sale. These differences stem from the economic priorities and fiscal policies of each state. Here are ways in which states differ in their sales tax policies:

• Types of exemptions: Some states offer exemptions that others do not. For example, though most states exempt purchases made by nonprofits and government agencies, the types of nonprofits that qualify (e.g., religious vs. educational institutions) vary. And though most states exempt certain goods such as groceries and prescription medications, other states tax these items.

• Use-based exemptions: States have different exemptions based on how an item is used. Items used in manufacturing or in the production of other goods, for example, might be exempt in one state but taxable in another. The criteria defining “use” can be very specific and vary widely, requiring businesses to carefully document the intended use to qualify for exemptions.

• Resale exemptions: Most states with a sales tax offer a resale exemption for items that are bought for the purpose of being sold again by the purchaser. But the requirements to prove intent to resell can differ, which affects how businesses document and report these transactions.

• Occasional or casual sale exemptions: Some states provide exemptions for sales that are occasional or casual and not made in the normal course of business, such as a business selling off old office furniture. These exemptions are not uniformly applied across all states, and the definitions of what qualifies as “occasional” or “casual” can be subject to interpretation.

The process of applying for, maintaining, and using exemption certificates can also differ by state. Some states require periodic renewal of exemption certificates, while others accept them indefinitely unless there is a change in use or the status of the certificate holder. The rigor with which businesses must document their qualifications for exemptions and maintain records can also vary by state, creating different levels of compliance costs and efforts.

Choosing the right exemption certificate

Here’s a guide to choosing the right exemption certificate:

• Understand state requirements: Because each state has its own tax laws and types of exemption certificates, the first step is to thoroughly understand the requirements of the state where the goods are sold or used. This includes identifying which types of sales are exempt and the corresponding certificates required by the state’s tax authority.

• Determine the type of exemption: Exemptions can vary based on the nature of the purchaser (e.g., nonprofit, government agency), the use of the purchased item (e.g., resale, manufacturing, agricultural use), or the type of product (e.g., food, medical supplies). Businesses need to identify the basis of their exemption claim and select the certificate that matches this basis.

• Use correct forms: Each state has its own forms for exemption certificates. It’s important for businesses to use the correct form provided by the state’s tax authority to ensure the exemption is recognized. These forms can usually be found on state government or tax department websites.

• Provide complete and accurate information: When filling out an exemption certificate, businesses must accurately provide all required information. This includes the business’s name, address, type of business, reason for exemption, and a valid taxpayer identification number. Any incomplete or incorrect information can lead to the rejection of the exemption claim.

• Keep up-to-date records: Businesses should keep updated records of all exemption certificates they issue and accept. These records should be easily accessible for audits and reviews to prove the exemptions were valid and properly documented at the time of the transaction.

• Regular review and renewal: Some states require exemption certificates to be renewed periodically. Businesses should keep track of the expiration dates of their certificates and renew them as necessary to maintain their validity.

What counts as a complete sales tax exemption certificate?

A complete sales tax exemption certificate must meet certain criteria to be valid and effective for use in exempting a purchaser from sales tax. Here’s what typically constitutes a complete certificate:

• Complete information: The certificate must include all necessary information without any omissions, including the date of issue, purchaser’s name and address, seller’s name and address, type of business, Taxpayer Identification Number (TIN), description of goods or services purchased, and reason for exemption.

• Correct form: The document must be the correct form as prescribed by the relevant state tax authority. Different states can have different forms depending on the type of exemption being claimed.

• Signature and declaration: A valid certificate typically requires the signature of the purchaser or an authorized representative. By signing, they declare that the information on the certificate is accurate and that the purchased goods qualify for the exemption under penalty of perjury.

• Compliance with state specifics: Some states might have additional requirements such as specific declarations, registration numbers, or preapproval by tax authorities before a certificate is considered valid.

Who can use sales tax exemption certificates?

Sales tax exemption certificates are used by businesses that qualify under state-specific regulations to purchase goods without paying sales tax at the point of sale. Here’s who typically uses them and how:

• Resellers: These businesses are exempt from paying sales tax on goods they purchase for resale. The exemption prevents a tax-on-tax situation because the final customer will pay sales tax upon purchase. Resellers must provide their exemption certificate proactively so they aren’t charged sales tax by suppliers.

• Manufacturers: Manufacturing businesses can use these certificates for buying raw materials or machinery that are directly involved in the production process. Because the final product will bear sales tax, taxing the inputs would constitute double taxation. These exemptions are tightly regulated to ensure the items are used in manufacturing.

• Nonprofits: Entities such as charities, religious organizations, and educational institutions often qualify for sales tax exemptions. These groups must prove their nonprofit status and that their purchases are directly related to their tax-exempt purposes, such as educational materials for a school.

• Government entities: Federal, state, and local governments use exemption certificates for purchases that are made as a part of their public service duties. This facilitates more efficient use of public funds by eliminating unnecessary tax expenditures.

• Agricultural producers: Farmers and ranchers qualify for exemptions on purchases directly related to producing agricultural products such as livestock feed or farming equipment. This supports the agricultural sector by lowering operational costs associated with food production.

• Foreign diplomats and international organizations: Diplomats and international organizations might be eligible for exemptions based on diplomatic agreements that serve to facilitate international relations. Eligible purchasers must provide certificates that are recognized under international treaties or US policies.

• Healthcare facilities: In some jurisdictions, healthcare providers can purchase medical supplies and equipment tax-free if they are used directly in patient care.

• Contractors: Contractors who work directly for exempt entities such as governments or nonprofits can purchase materials for specific projects tax-free—if those projects fall under the umbrella of the entity’s tax-exempt status.

Sales tax exemption certificate by state

Below is a rundown of sales tax exemption certificate requirements for all 45 states that impose a statewide sales tax. This list excludes Alaska, Delaware, Montana, New Hampshire, and Oregon, all of which do not impose a statewide sales tax.