How can you tell if a transaction should be sales tax exempt?

by Lucinda Rowlands July 24, 2013

sales tax exempt

sales tax exempt

State governments charge sales taxes on many purchases but not on all of them.  Each state exempts a number of transactions from sales taxes. You need to be aware of these exemptions so you can avoid collecting unnecessary taxes while still staying compliant.

Common types of tax-exempt sales

In many states, the sales of farm equipment is one of the types of transaction that are exempt from sales and use tax.

While each state has different exemptions, a few categories come up regularly. Sales to non-profit organizations like schools, churches, and hospitals are often exempt from sales and use taxes. If you are selling merchandise to another business that plans to resell the items, the sales could be sales tax exempt.

Some household necessities like food and medicine can be exempt from sales taxes as well.  To stimulate the economy, some states also exempt sales to manufacturers or farmers. These are some categories that pop up regularly but what will be sales tax exempt for your business really depends on where your business is located.

So how do you figure out exactly what is exempt? Well, first-off purchasers need to show you a tax exemption certificate before they can make tax-exempt purchases. You are responsible for keeping  an updated copy of this certificate on file. You also have a couple options yourself to predict what sales you’ll need to collect taxes on and what you don’t.

Option 1 – Go straight to the state

State governments do their best to make sure business owners can quickly and easily determine which sales should be taxable and which shouldn’t. The office in charge of taxation for your stateshould have a website where it lists tax-exempt items. The name of this office is different in each state. For example in Washington it’s called the Department of Revenue while in New York it’s the Department of Taxation and Finance. However, the role is the same: to manage taxation for the state.

If there is anything that seems unclear on the website, you can try contacting the department directly. Most state offices take questions through phone, e-mail, or you can visit the branch in person if you live close enough. This can work well because you’re getting the answer straight from the source, but isn’t always convenient and government service isn’t always fast.

Option 2 – Hire a sales and use tax specialist

Since tax laws are always changing, keeping up with the sales and use tax exemptions can become a full-time job, especially if you’re dealing with multiple states and counties. Another way for your business to keep track of rates and rules is to work with a sales and use tax specialist. These companies stay on top of every change so you don’t have to. This way you can focus on your business while someone else makes sure your company stays compliant with tax law.

Either option can work, just be sure you are keeping track of sales tax exemptions to help keep your business and your clients following the rules.

David Rodeck
Lucinda Rowlands
Lucinda Rowlands

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