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Dealing with Exempt Organizations, Sales Tax and Nexus

Christine Bellin

If your business sells a taxable product or service to organizations exempt from sales tax, you are probably in the business of exemption certificate management. But what happens when you have an exempt customer or client in a state where you do not have nexus? When it comes to exemption certificates, do you know “when to hold ‘em and when to fold ‘em?”

Here’s the deal: If your business does NOT have nexus in a state, and therefore no requirement to collect sales tax, you are NOT required to collect exemption certificates for any of your sales into that state.

Exemption certificates are needed when:

1. you have nexus; and
2. the transaction is taxable, but the customer should not be charged tax for some reason (for example, they are an exempt organization or purchasing for resale).

Think of the catalogs you get in the mail where the order form says, “If shipped to Connecticut (CT), Vermont (VT) or Massachusetts (MA) add sales tax.” This means that the catalog company has nexus in each of those states and a requirement to charge sales tax.  If the catalog company only has nexus in these three states, then they are not required to collect tax in any other state. If they make a $1,000 sale of shirts to a corporation in Texas (TX), no tax would be charged because they do not have a presence in TX. Same if they make a $1,000 sale of shirts to a non-profit school in Texas, no tax would be charged because they have no nexus in Texas. However, in CT, VT or MA, if the company makes a sale to a tax-exempt organization, they are required to maintain documentation that supports the tax-exempt status: an exemption certificate.

Remember, exemption certificates are documents which justify why no tax was collected when it would otherwise be taxable.  If you are not required to collect tax in the first place, because you do not have nexus, no documentation is needed.

If you’d like to learn more about how proper exemption certificate management enhances your customer relations, improves efficiency and reduces audit risk, read our FREE white paper “The Relationship of Customer Service and Exemption Certificate Management” today.

Avalara Author
Avalara Author Avalara
Avalara helps businesses of all sizes get tax compliance right. In partnership with leading ERP, accounting, ecommerce, and other financial management system providers, Avalara delivers cloud-based compliance solutions for various transaction taxes, including sales and use, VAT, excise, communications, and other indirect tax types. Headquartered in Seattle, Avalara has offices across the U.S. and around the world in the U.K., Belgium, Brazil, and India.