Sales tax exemptions are situations in which specific goods or services do not have to include sales or use tax. These exemptions, dictated by state and local tax laws, cater to different economic and social policies by reducing the tax burden on essential items, promoting business activities, or supporting nonprofit endeavors. For instance, products such as groceries, medication, and educational materials are often exempt to lower the cost of living, while exemptions for industrial equipment encourage investment in productive capacity.

The scope and application of these exemptions varies across jurisdictions, and specific customer categories such as government entities, nonprofits, and educational institutions might also benefit from broad exemptions because of their roles in society. These exemptions influence customer behavior and business strategies and reflect a delicate balance between generating revenue for public services and stimulating the economy.

Below, we’ll explain who can get sales and use tax exemptions, how to register for and calculate sales tax, and how to report and file sales tax.

What’s in this article?

• Who can get sales and use tax exemptions?
  
• Getting and keeping exemption certificates
  
• How to register for sales tax
  
• How to calculate sales tax correctly
  
• Reporting and filing sales tax
  
• How to integrate sales tax with other business systems
  

Who can get sales and use tax exemptions?

Here’s a breakdown of common categories and entities that might receive sales and use tax exemptions:

• Nonprofits: Many states have sales tax exemptions for registered nonprofits including charities, religious organizations, and educational institutions. These organizations typically must apply for exemption status and provide proof they are a nonprofit.

• Government agencies: Federal, state, and local government agencies are typically exempt from paying sales tax on purchases made for official use.

• Resellers and wholesalers: Businesses that purchase goods to resell can apply for a reseller’s permit, which lets them buy items without paying sales tax. The tax will be collected when the items are sold to the final customer.

• Manufacturers: Some states have exemptions for materials, machinery, and equipment purchased for use in production and manufacturing processes.

• Foreign diplomats: Foreign diplomats and certain members of international organizations might receive sales tax exemptions as part of their diplomatic benefits.

• Educational institutions: Schools, universities, and other educational institutions might be exempt from sales tax on purchases related to their educational mission.

• Healthcare providers: Hospitals and other medical facilities are typically exempt from sales tax on purchases of medical supplies and equipment.

• Certain agricultural uses: Farmers and agricultural producers often qualify for exemptions on purchases of farming equipment and supplies used directly in agricultural production.

Getting and keeping exemption certificates

Applying for a sales and use tax exemption certificate typically involves submitting specific documentation and forms to the relevant tax authority. Here’s how to get these certificates:

• Determine eligibility: Before applying for an exemption certificate, confirm your organization or business qualifies based on your state’s criteria. This could mean you are a certain type of organization (e.g., nonprofit, educational) or you use the purchased goods in a way that qualifies for exemption (e.g., for resale, for manufacturing).

• Apply with the state tax authority: Most states require that you apply for an exemption certificate through their tax authority. This typically involves filling out an application form and providing documentation that proves your eligibility.

• Provide necessary documentation: Supporting documents might include proof of nonprofit status—such as a 501(c)(3) determination letter from the IRS—a business license, or a resale certificate. Requirements vary by state and exemption type.

• Wait for approval: Once your application is submitted, the state will review it and issue an exemption certificate if you meet all requirements. The time frame for processing can vary widely.

Once your certificates are granted, follow these steps to keep them active:

• Organize and store certificates: Keep a digital and physical copy of all exemption certificates. Organize them by state or type of exemption to simplify the management process.

• Track expiration dates: Some exemption certificates have expiration dates. Keep a record of these dates, and begin the renewal process well in advance to avoid lapses in exemption status.

• Renew as needed: Check whether your state requires renewal of the exemption certificates, and note the renewal process, which might involve submitting current documentation and a renewal application.

• Update certificates for changes: If there are major changes in your organization, such as a change in address, structure, or exempt activities, you might need to update your exemption certificate. This often involves notifying the state tax authority and submitting new documentation.

How to register for sales tax

To collect sales tax, you need to obtain a Certificate of Authority from your state’s revenue or taxation department. This certificate permits you to collect sales tax from customers and remit it to the state. Businesses don’t need to register separately for use tax but are required to complete a form declaring any use tax with their home state monthly or quarterly.

The process for registering for sales tax can vary slightly depending on your state, but here’s a general outline:

• Determine eligibility: Check your state’s laws to see whether your business activities require you to collect sales tax. This typically applies to businesses selling taxable goods or services within the state. Some states have thresholds for sales volume or transaction numbers that trigger the requirement to collect sales tax.

• Create an account: Most states offer online registration through their revenue department website, and some states might allow registration by mail or in person. To register online, you typically need to create an account and provide this business information:

  • Legal business name and structure (e.g., sole proprietorship, LLC, corporation)
    
  • Federal Employer Identification Number (EIN)
    
  • Business address and contact information
    
  • Nature of business activities
    
  • Expected sales volume
    
  • Start date of business operations
    

• Complete the application: Fill out the registration application accurately and completely. Answer questions about your business activities, sales locations, and types of products or services sold. You might be asked to estimate your expected sales volume and frequency of filing sales tax returns (e.g., monthly, quarterly, annually). In some cases, you might need to provide additional documentation, such as your business license or articles of incorporation.

• Review and submit: Carefully review all the information you’ve provided. Submit your application online, by mail, or in person, as required by your state.

• Receive your Certificate of Authority: If your application is approved, you will receive a Certificate of Authority from the state. This document typically includes your sales tax identification number and the effective date of your registration. You must display this certificate at your place of business, and it might be required for filing sales tax returns.

How to calculate sales tax correctly

Follow these steps to accurately calculate sales tax:

Identify the applicable sales tax rate

First, determine the total sales tax rate that applies to each sale. This rate might include:

• State sales tax: Most states in the US impose a state sales tax, with the exception of Alaska, Delaware, Montana, New Hampshire, and Oregon.

• Local sales taxes: Counties, cities, and other local jurisdictions might add additional taxes on top of the state tax.

• Special district taxes: Certain areas might have additional taxes for specific districts, such as hospital districts or power districts.

Sales tax rates can vary widely by state and within individual counties or cities. Tools including state department of revenue websites, tax calculators, or automated solutions through accounting software can help you find accurate rates based on your location.

Determine whether the product or service is taxable

Not all goods and services are taxable. For example, in some states, groceries, prescription medications, and educational services are exempt from sales tax. You’ll need to know the taxability of your offerings to properly calculate sales tax. Here’s a guide:

• Physical products are usually taxable, though there are exceptions.

• Service taxability varies widely; some states tax many services, while others tax few.

• Digital goods are increasingly taxable, but this varies by state.

Include shipping and handling, if applicable

In some states, shipping and handling charges are taxable if they are part of the sale of taxable goods. Whether you include these charges as part of your taxable amount can depend on how they are invoiced to the customer (e.g., separately stated, included in the price of the product).

Calculate the tax

Once you have the correct rate and the taxable base, calculating the tax is straightforward:

Taxable Amount x Tax Rate = Sales Tax

For example, if you sell a taxable item for $100 in a location with a total sales tax rate of 8.25%, the sales tax would be:

$100 × 0.0825 = $8.25

In this case, the total amount the customer pays is $108.25.

If the sale involves tax-exempt items or customers (such as resellers or nonprofits) or if you offer discounts, adjust the taxable amount before applying the tax rate. For discounts, apply the discount first, then calculate the tax on the reduced sale price.

Ensure compliance and proper documentation

Tax laws and rates can change, so stay updated to make sure you’re in compliance. Using automated tax compliance tools can help manage these changes. For each transaction, be sure to document how you calculated the tax, what the tax rate was, and what the taxable and exempt amounts were—this documentation will be important for tax filings and potential audits.

Reporting and filing sales tax

Follow these steps to report and file sales tax:

• Gather sales records: Collect all sales records that detail taxable and nontaxable transactions, exemptions, and any discounts applied. This includes in-state and out-of-state sales if you have a nexus (a notable business presence) in multiple states.

• Organize transactions by jurisdiction: Because sales tax rates vary by jurisdiction, organize your transactions accordingly. This means separating sales based on where your customers are located, not where your business is based. For each jurisdiction, you’ll need to report the total amount of sales and the amount of sales tax collected.

• Calculate total sales tax owed: Using the records you’ve gathered and organized, calculate the total amount of sales tax you owe to each jurisdiction. This involves:

  • Summing taxable sales for each jurisdiction
    
  • Applying the appropriate sales tax rate to these sums
    
  • Accounting for any other taxes that apply under local law, such as county or city taxes
    

• Prepare sales tax returns: Most states provide forms (paper or online) for filing your sales tax returns. Fill out these forms with your calculated totals, and include detailed information as required, such as breakdowns of taxable and nontaxable sales, tax collected, and applicable deductions or exemptions.

• File returns by the deadline: Deadlines for filing sales tax vary by state and sometimes by the volume of your sales. Typically, businesses file monthly, quarterly, or annually. Ensure you file your returns by the due date for each jurisdiction to avoid penalties and interest for late filing.

• Make payments: When you file your sales tax returns, you will also need to pay the amount of sales tax due. This can usually be done online through the tax authority’s website, by electronic funds transfer (EFT), or by mailing a check. Keep proof of payment for your records.

How to integrate sales tax with other business systems

Here’s how to integrate sales tax handling into your tech setup:

• Map out connections: Figure out where sales tax calculations need to plug into your systems. This might include your online store, accounting software, or the technology you use to manage customer relationships or inventory. Knowing where these points connect will guide the integration process.

• Choose the right tax management software: Choose tax software that can integrate with the systems you already use. Stripe Tax, a feature of Stripe’s payment processing platform, can be a smart choice if you’re already using Stripe for other aspects of payment processing. Stripe Tax integrates with other Stripe products such as Stripe Checkout and Stripe Billing for a unified payment and tax management experience. Here’s how it can help:

  • Registration reminders: Stripe Tax monitors your transactions and notifies you when you approach thresholds that might require you to register for sales tax in new jurisdictions.
    
  • Jurisdiction determination: Stripe Tax automatically determines the correct tax jurisdiction based on the customer’s shipping address or billing address.
    
  • Automated real-time calculations: Stripe Tax can integrate with your online store or checkout process to calculate tax in real time during the transaction. Stripe Tax automatically calculates the correct sales tax amount based on the customer’s location, product or service type, and any applicable tax exemptions.
    
  • Tax exemptions: Stripe Tax lets you set up tax exemptions for specific customers or products.
    
  • Comprehensive reports: Stripe Tax generates detailed reports summarizing your sales tax obligations to match formatting requirements for each filing location.
    

• Hook everything up with application programming interfaces (APIs): Use APIs to connect your chosen tax management software to your ecommerce platform, accounting software, or any other system that needs to deal with sales tax. This setup allows for real-time tax calculations and updates whenever tax laws change.

• Set up your tax rules: In your tax software, configure the specific tax rules that apply to your products and sales. This might involve setting up different tax rates for different locations or specifying items that are tax-exempt. Many tax tools come with rules that you can adjust to fit your needs.

• Test everything: Before you go live, run tests to make sure everything works as expected. Check that the tax rates are applied correctly in a variety of scenarios, such as different customer locations and product types.

• Sync your data: Ensure all your systems are communicating with each other. Your customer records, sales details, and product info should be up-to-date and consistent across platforms. This helps make accurate tax calculations every time.

• Automate tax reporting and filing: Connect your tax software to your accounting software to automate the tedious parts of tax reporting and filing. This can save you time and help you meet filing deadlines more easily.