Sales Tax Automation 201: Exemption Certificates
Chapter 1: The Basics
Sales tax is a complicated world. We’ve put together this series to give you the information you need to navigate the complexities of compliance, as well as the solutions offered through sales tax technology. In this chapter, we introduce sales tax exemption certificates: what they are and who uses them.
Who gets a sales tax exemption and why?
Most states have some tax-exempt goods, like groceries, medical supplies, or prescription drugs. In some transactions, the purchasers themselves are exempt from sales tax. When tax-exempt customers make qualified purchases on behalf of their organizations, they present a sales tax exemption certificate, and the tax is omitted from the sale.
Tax-exempt organizations can include:
Government entities — Schools, police departments, city councils, etc. can make purchases for the operation of their office, agency, or department without paying sales tax.
Nonprofits — Charitable organizations, religious groups, and fraternal societies can all apply for tax-exempt status. If granted, purchases in service of the organization, fundraising, etc. may qualify for sales tax exemptions.
Resellers — When individuals or companies purchase goods intended for resale, the sales tax is paid by the end customer, not the reseller.
What are exemption certificates?
A sales tax exemption certificate verifies tax-exempt status and is presented to a seller at the point of sale. The seller ensures the certificate is valid and retains a copy for their records, then omits the sales tax on the purchase.
Exemption certificates are extraordinarily valuable and should be stored, managed, and maintained properly. During an audit, a seller must produce an exemption certificate for each tax-exempt purchase. If a certificate was invalid or expired at the time of the sale, or is missing during an audit, the seller is responsible for remitting the missing tax, along with any applicable penalties or fees.
Who issues sales tax exemption certificates?
Qualified organizations can apply for a sales tax exemption certificate with the state sales tax authorities. Like most things related to sales tax, the process and qualifications vary from state to state. Some states honor out-of-state certificates, others require a certificate specific to their state.