Exemption certificates are documentation you may receive from buyers that tells you they are not required to pay sales tax. Sales tax exemption rules vary by state, but there are two popular types of exemption certificates you should know: Entity and Usage.
Entity Exemption Certificates tell you a certain organization is exempt from sales tax because of the type of organization they are.
Organizations that are exempt from sales tax can include the federal government, state and local governments and nonprofit or charitable groups, but the specific rules for these exemptions vary by state. Check local state jurisdictions for their specific rules if a customer provides you with an exemption certificate to make sure the transaction is covered. Then be sure to keep a copy of their documentation and the record of the transaction (invoices, purchase orders, receipts) for at least 3 years to ensure you can justify the exemption.
Usage Exemption Certificates tell you a purchase is exempt from sales tax on a specific transaction because they intend to sell those products to other consumers, generating the sales tax revenue for the state in that subsequent transaction.
The most common form of usage exemption is resale. Resale certificates are used when a buyer intends to resell the purchased items to a different customer. Since the state will collect sales tax on that subsequent purchase, the initial purchase is tax exempt. There are some things to remember when dealing with resale certificates (also referred to as reseller’s permits):
You, as the original seller, are responsible for verifying that the resale certificate is valid. States allow searches to ensure authentication. If you accept an invalid certificate, you may ultimately owe sales taxes on that item.
Resale certificates can only be used for items that are intended to be resold or for components of items that will be sold, like fabric for a pillowcase. Items like packing materials or office supplies, if used to run a business vs. being resold, are not applicable for exemption.
Some retailers do not accept resale certificates. In some cases, like for Target, reseller certificates are not accepted to keep the merchandise within the Target brand vs. being sold elsewhere. Additionally, there can be risk if an invalid or fake reseller certificate is accepted. For many businesses this risk is low, but for a company the size of Target, the risk is much higher.
If you do choose to accept resale certificates, be sure to keep a copy of the certificate as well as transaction records (invoices, purchase orders, receipts) for at least 3 years.
In some cases, companies will have direct pay certificates instead of resale certificates. These are not technically tax exemption, but rather obligation transfers that shift the requirement of paying sales tax from the seller of the items to the buyer. Direct pay certificates are used for large purchases of multi-use items.
Other exemptions that cover specific usage include call centers, high tech, temporary storage, offshore (oil rigs), manufacturing, agricultural, movie production, and warehousing, but, like you’ve heard us say before about sales tax… the list varies by state.
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