State, city, county, and sales tax laws can be complicated. Business owners who encounter these complexities while trying to run their business may be overwhelmed to the point where they don’t know what to do. Sales tax exemptions can be a huge benefit for businesses and consumers alike. However, not everyone is eligible for these exemptions. So, who qualifies for sales tax exemptions?
The first thing to consider is whether or not your business has a sales tax nexus in the state where you’re trying to claim the exemption. A sales tax nexus is a connection between your business and the state that allows the state to require you to collect and remit sales tax.
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In general, if you have a physical presence in a state, you have a sales tax nexus there. This includes offices, warehouses, and stores. If you’re just selling products online to customers in another state, you don’t have a sales tax nexus in that state and can’t claim the exemption.
What Is a Sales Tax Exemption?
A sales tax exemption is a reduction or elimination of the amount of sales tax that would ordinarily be charged on a particular type of purchase. For businesses, this generally means that the business does not have to pay sales tax on the items it purchases to use in its operations.
In the USA tax exemption cards are issued by the state. The cards work at a federal level as well, meaning that tax-exempt cards are accepted in any state of the US. When making a purchase card must be shown to the vendor – who can simply verify the card online to make sure it is valid.
In most cases, consumers are the ones who reap the benefits of sales tax exemptions. For example, consumers who purchase goods that are considered to be “necessities” such as food, clothing, and medicine typically do not have to pay sales tax. But, some exceptions apply to this rule as well. For instance, consumers may have to pay sales tax on items such as cars, boats, and plane tickets.
There are a few general rules that apply across the board. Let’s have a look at some broad categories of products that are typically exempt from sales tax.
- Prescription drugs
- Over-the-counter drugs
- Medical equipment
- Financial instruments
- Energy used to operate buildings
- Commodities and futures
The products and services that are exempt from sales tax vary from state to state. It’s important to do your research before assuming that a particular purchase is exempt.
For example, in Iowa, the following items are exempt from sales tax:
- Food for human consumption
- Footwear Prescription drugs
- Nonprescription drugs
- Medical equipment
- Sales to farmers for agricultural purposes
In California, the rules are a little different. The following items are exempt from sales tax:
- Food for human or animal consumption
- Gasoline and diesel fuel used in motor vehicles
As you can see, there is a lot of variation when it comes to sales tax exemptions. The best way to find out exactly what is and isn’t exempt in your state is to consult your state’s Department of Revenue.
Now that we know what a sales tax exemption is, let’s take a look at who qualifies for them. Generally speaking, the following types of businesses are exempt from sales tax:
- Retailers who sell goods for resale
- Businesses that are engaged in interstate commerce
- Charitable organizations
- Governmental entities
It’s also worth noting that some states have what is known as a “use tax.” This is a tax that is imposed on items that are brought into the state for use, even if those items were purchased tax-free in another state.
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What Are the Sales Tax Exemptions for Online Retail Businesses?
One question that many business owners have is whether or not their online retail business is exempt from sales tax. The answer to this question depends on the state in which you are doing business.
Some states, such as Texas, do not impose a sales tax on retail sales that are conducted online. Other states, such as California, have a sales tax that applies to online retail sales.
How to Understand and Select the Right Exemption
As a business owner, understanding the different types of exemptions and which ones apply to your company can be confusing. The best way to make sure you are taking advantage of all the tax exemptions for which you qualify is to work with an accountant or other tax professional. They will be able to help you navigate the complex world of sales tax exemptions and make sure you are taking full benefit of every available break.
To benefit from sales tax exemptions, you need to meet certain requirements in terms of who you are, what you do, and how you do it. You can be required to register for a sales tax exemption even if you don’t think you need to. Do your research, work with an expert tax consultant, and make sure you are getting all the tax breaks to which you’re entitled.