Dawn Moser Feb 17, 2023
We’ve talked about sales tax exemptions many times on this blog. The big caveat is always the same: Each state has its own rules. Figuring out sales tax exemption certificates can be particularly daunting.
To that end, here’s a primer on sales tax exemption certificates. You can also just jump directly to our state-by-state guide to certificate requirements.
A sales tax exemption certificate is a document that allows a business, organization, or individual to purchase normally taxable goods or services tax free.
Purchasers apply for exemption certificates and provide them to sellers at checkout. In the case of a blanket certificate, it’s not necessary to use a new certificate for each purchase, as long as the qualifying factors are the same and the certificate is valid.
Sellers are required to collect and validate certificates prior to exempting tax. If a certificate is incomplete, expired, or unavailable, the seller is responsible for collecting tax and the purchaser can later request a refund from the state.
Sellers store each certificate, so it’s accessible for future purchases or to validate the exemption if the business is audited.
Some states use the same document for both exemption and resale certificates. Others have different documents for each.
Getting a sales tax exemption sounds like a pretty sweet deal, but alas, it’s not an option for everyone. Exempt entities vary for each state, but often include:
Do states use the same exemption certificates for all exempt purchases?
No. Most states have certificates for specific types of exemptions. And collecting the wrong certificate for an exemption is often the same as having no certificate: The seller can be liable for the uncollected taxes.
Some states, like California and Kentucky, have different certificates for each type of exemption, including specific industries. This can also be true for different types of nonprofit organizations, as is the case for Colorado and Maine, to name a couple.
Exemption certificates are worth every penny of tax you’ve omitted, and possibly more. If you’re audited and can’t produce a certificate to justify an exempt sale, you may be responsible for the applicable taxes, as well as potential penalties.
States have their own statutes of limitations for sales tax audits. Certificates from exempt purchases should be kept for at least the time frame for which you could be assessed.
There are also variations on when certificates expire. Some certificates never expire, some are only good for a year. Even if there’s no official expiration, it’s good to verify the information is up to date every couple of years or so. Changes to a business, such as name, address, and ownership, can void an exemption certificate.
Sales tax nexus is a relationship between a business and a state that creates an obligation for the business to register to collect tax and file returns in a given state. All states with a general sales tax (plus Alaska, Puerto Rico, and Washington, D.C.) have economic nexus conditions based on a business’s amount of sales and/or number of transactions.
Each state has its own rules concerning whether exempt sales count toward economic nexus totals. So even if you aren’t required to collect taxes, you may still be required to register and file returns in a state.
If you do establish nexus, you’ll need to either collect sales tax or a valid exemption certificate on any normally taxable sales. Otherwise, you could be held liable for the uncollected tax.
Many states exempt certain products from sales tax, such as food for home consumption in Washington or diapers and feminine hygiene products in Colorado. In these kinds of cases, you do not need to collect a certificate to exempt tax on each sale.
Important note: Tax rules change and exceptions are common. The information here is subject to change and offered for informational purposes only. It should not be used as tax advice.
Please consult a sales tax expert who can discuss the details that apply to your business.
