How Exemptions Can Help Save Money On Your Purchases
Many companies and individuals inadvertently pay sales tax on purchases that might have in fact been exempt by presenting an exemption certificate to the seller.
An exemption certificate is presented by the purchaser to the seller to keep from having to pay sales tax on a purchase. Each state has different laws regarding exemptions but in general, exemptions are based on four main things:
Exemptions can be applied based on 4 different things
Type of item: It’s not always straightforward, but some items are taxable and others aren’t. For example, in most states, prepackaged foods are tax-exempt whereas prepared or hot foods are taxable. In Pennsylvania, a bottle of cold-brewed coffee is not taxable, but a cup of hot-brewed coffee is taxable. As a simple reminder, if items are not taxable for all purchasers, there is no need for an exemption certificate.
The type of entity: Different types of entities have different exemptions and allowances. Most religious organizations, charities, and nonprofits are sales tax exempt. For example, if you’re buying a new stove for a church to cook for the congregation, you do not have to pay sales tax on the stove, as it is being used for a charitable purpose. Other entities included in this type of exemption can be government entities, schools, etc. Keep in mind that not all states give an exemption to nonprofits, such as California, and not all local governments are exempt.
How you’ll use the item you’re purchasing: Generally, an entity is exempt if you can supply a correct exemption certificate. If you’re buying an item in order to resell the item, you most likely won't pay sales tax on the items. This is because you’ll collect the tax when you sell the item to your consumer. Manufacturers can be exempt if they’re using or consuming the items in the manufacturing process.
Project-based: Some states have what are called enterprise zones. These are special undeveloped zones in which the government gives incentives to encourage business development within that zone. One of those inviting incentives is the sales tax exemption. Contractors building in an enterprise zone are sales tax exempt from any purchases of items used in the construction. In addition, when doing a project for an exempt entity, the exemption sometimes, but not always, flows through to the contractor.
Why is it important to have certificates?
To put it simply, it is proof that you are exempt from paying sales tax. Even if you are an exempt non-profit, generally a vendor cannot accept your word for it or even federal documentation. You generally must have documentation from the state to show that you are exempt from paying tax on a purchase. As a best practice, double-check the status of your exemption within your state every 3 years.
How do I obtain an exemption certificate?
For-profit entities:
For-profit entities usually have to take two steps to receive a sales tax exemption on a purchase. You’re most likely reselling the item you want to purchase tax-free. In this case, your first step is to apply for a sales tax permit if you do not already have one within that state. Once you’ve obtained the sales tax license or number, state certificates work in one of two ways. In some states, there is a certificate that is completed by the state which you can download and give to your vendors. In the majority of the states though you will need to fill out a blank resale certificate entering in all the required information, which can then be presented to your vendors.
Nonprofit entities:
Most vendors do/should not accept the federal 501(c)(3) certificate as proof of being sales tax exempt in the given state. You will have to apply for one in the state where you are making a purchase. This special exemption certificate becomes the only certificate you need when making purchases.
In summary, sales tax exemptions can not only save you money but they give you a good incentive to track your accounts and records. If you have further questions, Sales Tax and More is here to give guidance on where and when you can receive a specific sales tax exemption.
By: Priya Sorathia
This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.