Sales tax is a tax imposed on the sale of goods and services in the United States. While sales tax rates vary by state and local jurisdictions, the average combined state and local sales tax rate is around 7-9% nationwide.
However, there are many types of sales that are exempt from sales tax in the US. Sales tax exemptions are granted to provide tax relief for certain goods and services, and to certain groups and organizations.
Understanding the different categories of sales tax exemptions can help businesses and consumers legally minimize the sales tax they owe.
What is Sales Tax?
Sales tax is a consumption tax paid by the buyer to the seller on the purchase of taxable goods and services. It is collected by the seller at the point of sale, and then remitted to the appropriate state and local tax authorities.
The sales tax rate varies widely across the country:
- State sales tax rates range from 2.9% in Colorado to 7.25% in California, with an average of around 5-6%.
- Local jurisdictions (cities, counties, etc) often add their own sales tax on top of the state tax. Combined state and local rates can be as high as 10-12% in some areas.
- Five states have no state sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, some localities in those states may still impose sales taxes.
Sales tax generally applies to the sale of tangible personal property (goods), like clothing, furniture, cars, office supplies, household items, etc. Sales tax sometimes also applies to certain services like hotel stays, restaurant meals, car repairs, etc.
The definition of taxable goods and services varies by state and locality. All states provide exemptions for certain essential goods like food and medicine, and exempt certain organizations like charities and governments.
Types of Sales Tax Exemptions
There are several broad categories of goods and services that are exempt from sales tax under many state laws:
Food and Groceries
Most states exempt at least some food and groceries from sales tax. Many states exempt most food purchased for home consumption, while taxing prepared foods, soft drinks, candy, dietary supplements, etc.
For example, California exempts basic groceries like meat, produce, bread, cereal, milk, cheese, etc. But prepared hot foods, alcohol, and soft drinks are still taxable.
Some states tax groceries at lower rates rather than fully exempting them. For example, Virginia taxes groceries at 2.5% rather than the full 5.3% sales tax rate.
Clothing and Footwear
Many states provide sales tax exemptions or holidays for clothing and footwear, especially during back-to-school shopping seasons.
For example, Massachusetts has a two-day sales tax holiday in August every year where clothing and footwear under $2,500 per item are exempt from the state’s 6.25% sales tax.
Some states only exempt certain clothing items, like those below a price threshold or for children’s sizes. Other states fully exempt all clothing year-round.
Medical Products
Medicines, prescription and nonprescription drugs, medical equipment, and other health-related products are exempt from sales tax in most states.
For example, Arizona exempts prescription medicines as well as insulin, diabetic testing materials, prosthetic limbs, wheelchairs, crutches, hearing aids, and other medical devices.
Exemptions for medical products help reduce costs for sick and vulnerable populations.
Manufacturing Equipment
To support local manufacturing and industry, many states exempt purchases of equipment, machines, tools, supplies, and other items used primarily in manufacturing or production.
For example, Utah exempts purchases of equipment and machinery used in manufacturing operations or data center operations. The exemption aims to encourage capital investment and growth of those industries.
Farming and Agriculture
Supplies and equipment used in agriculture and farming are exempt from sales tax in most states. This includes machinery, tools, breeding livestock, seeds, fertilizers, and other farming inputs.
For example, Texas exempts tractors, combines, plows, and other farm machinery, as well as feed for livestock animals. This helps reduce costs for farmers and ranchers.
Nonprofit Organizations
Qualifying nonprofit organizations like charities, churches, schools, hospitals, and government entities are exempt from paying sales tax on their purchases in most states.
To qualify, nonprofits must obtain a state sales tax exemption certificate. The exemption helps nonprofits stretch their budgets further to fulfill their missions.
Specific Industries or Products
Some states provide exemptions for specific industries like mining, logging, commercial fishing, and more. States like Nevada and Louisiana exempt mining and mineral extraction equipment.
And some states exempt very specific products like flags, solar energy systems, gun clubs, and more based on state policy goals. These niche exemptions vary widely by state.
Common Questions About Sales Tax Exemptions
How do I qualify for a sales tax exemption?
The requirements vary based on the specific exemption. Many exemptions are automatically applied by sellers when you make qualifying purchases. But others require submitting exemption certificates issued by state departments of revenue.
Nonprofit organizations, wholesalers/resellers, farmers, and manufacturers often need to submit exemption certificates to claim exemptions. Check your state’s website for details on exemption certificates.
Can individuals ever qualify for sales tax exemptions?
In limited cases, yes. People with certain medical conditions may qualify for exemptions on medical equipment and supplies related to their condition.
And some states offer tax holidays where individuals can purchase certain goods tax-free for a short period. For example, back to school sales tax holidays for clothing and supplies.
But in general, sales tax exemptions are much more limited for individuals buying for personal use rather than business use.
Do online sellers have to honor sales tax exemptions?
Yes, online sellers are still required to honor valid state sales tax exemptions. Make sure to submit the proper exemption certificates.
Marketplaces like Amazon may have their own process for applying exemptions to marketplace purchases. Check with each marketplace for details.
Can I be exempt from sales tax on services?
It depends. Some service industries like legal, accounting, medical, and educational services are exempt from sales tax in many states. But exemptions for general services like auto repair or landscaping are less common.
Nonprofits and wholesalers may qualify for exemptions on some business services that are taxable for regular consumers. Always check state laws for details.
What happens if I improperly claim an exemption?
If you improperly claim a sales tax exemption you do not qualify for, you can face penalties from state tax authorities. This constitutes tax fraud.
It is your responsibility to ensure you only claim valid exemptions by carefully following state requirements. Consult a tax professional if you have any doubts.
Claiming Sales Tax Exemptions
Exemption Certificates
Many sales tax exemptions require presenting an exemption certificate to sellers to make tax-exempt purchases. Common certificates include:
- Resale certificates: For wholesalers purchasing goods to resell.
- Manufacturing exemptions: For manufacturers purchasing equipment and supplies.
- Agricultural exemptions: For farmers purchasing inputs like seeds, livestock, machinery.
- Charitable exemptions: For nonprofits like churches, schools, hospitals.
Certificates are issued by state tax authorities after an application process. Carry your certificate with you when making purchases.
Point of Sale
When making purchases that qualify for sales tax exemptions, make sure to bring your exemption certificate. At the point of sale:
- Present your valid exemption certificate before completing the purchase.
- Ensure the full purchase price is exempt, not just partial amounts.
- Obtain an invoice showing $0 sales tax was collected.
- If needed, remind sellers of their legal obligation to honor valid exemptions.
Online Purchases
For online purchases:
- Upload exemption certificates when prompted during checkout.
- Contact seller ahead of purchase to provide certificate.
- If charged tax improperly, seek refund after purchase.
Ensure exemption certificate requirements are met for online marketplaces like Amazon.
Use Tax
If you make out of state purchases tax-free for business use, you may owe “use tax” when bringing goods back into your home state.
Use tax is similar to sales tax but applies to purchases made out of state. Report and pay use tax on your tax return if required.
| State | Sales Tax Rate | Groceries Exempt? | Clothing Exempt? | Prescriptions Exempt? |
|---|---|---|---|---|
| Alabama | 4% | No | Yes, under $100/item | Yes |
| Alaska | 0% (no state tax) | N/A | N/A | N/A |
| Arizona | 5.6% | Yes | No | Yes |
| Arkansas | 6.5% | Yes | Yes, under $100/item | Yes |
| California | 7.25% | Yes | No | Yes |
H2: Sales Tax Exemptions by State
Sales tax exemptions vary widely across different states. Here is an overview of exempt goods and services in some key states:
Florida
Florida has a 6% statewide sales tax rate plus local taxes. Key exemptions include:
- Most groceries
- Most medical supplies and equipment
- Many agricultural items like livestock, feed, seeds, fertilizer
- Most manufacturing equipment and machinery
Texas
Texas has a 6.25% statewide sales tax. Key Texas exemptions include:
- Food, prescription drugs, and farming supplies
- Items purchased for resale or by manufacturers
- Energy and water utility purchases by businesses
- Data center equipment purchases
Illinois
Illinois has sales tax rates of 6.25% – 11% depending on location. Some Illinois exemptions:
- Food, prescription and nonprescription medicines
- Farming inputs, manufacturing inputs
- Motor fuel, cars (lower rates apply)
- Clothing and footwear under $125 per item
New York
New York sales tax rates range from 4% – 8.875%. Exemptions include:
- Most food, prescription and nonprescription drugs
- Medical equipment and supplies
- Farming equipment and supplies
- Clothing and footwear under $110 per item
- Newspapers and magazines
Notable Exemptions by Product Category
School Supplies
- Maryland exempts the first $100 of backpack and bookbag purchases in August.
- Texas exempts school supplies under $100 purchased in August.
- Louisiana has a statewide Annual Sales Tax Holiday for school supplies.
- Several states have tax holidays for computers and educational materials.
Energy Use
- Oregon exempts residential energy use including electricity, natural gas, oil, wood, etc.
- Idaho offers an energy equipment tax deduction for manufacturing facilities.
- Maryland exempts solar and wind energy equipment.
Digital Goods
- Louisiana exempts digital downloads and subscription services like music, movies, ebooks, software, cloud services.
- Ohio exempts digital books, magazines, newspapers, and music, but taxes streaming services.
- Washington taxes digital products and codes used to download them.
Requirements for Common Exemptions
Nonprofit and Charitable Exemptions
To qualify, an organization must:
- Be registered as a nonprofit with the IRS and state.
- Operate exclusively for religious, charitable, scientific, or educational purposes.
- Use profits only to further the organization’s mission.
- Refrain from political campaign activity.
- File annual tax returns with IRS Form 990.
- Apply for a state sales tax exemption certificate.
Farming and Agriculture Exemptions
To qualify, a business must:
- Have verifiable agricultural production activities like growing crops or raising livestock.
- Provide proof of valid agricultural operation like business registration, licenses, sales records, etc.
- Apply for an agricultural exemption certificate from the state revenue department.
- Use supplies and equipment purchased tax-exempt exclusively for agricultural purposes.
Manufacturing Exemptions
Manufacturing businesses must:
- Produce tangible goods for resale, not services.
- Provide NAICS or SIC industry code for qualifying manufacturing category.
- Prove equipment is used directly in manufacturing processes.
- Obtain a manufacturing machinery exemption certificate.
- Pay use tax if equipment is used for non-manufacturing.
Other Considerations for Sales Tax Exemptions
Nexus
To qualify for sales tax exemptions, businesses typically need nexus or a physical presence in the state where they are claiming exemptions.
Out-of-state purchasers won’t qualify for exemptions since they aren’t liable for collecting/remitting sales tax in the first place unless they have nexus.
Use Tax
When claiming exemptions, businesses should still track tax-exempt purchases and pay any corresponding use tax owed.
Use tax is due when exempt goods are used in non-exempt ways. Proper use tax reporting is important for avoiding problems in tax audits.
Blanket vs. Single Purchase Exemptions
Blanket exemptions apply automatically to recurring exempt purchases. Single purchase exemptions require submitting certificates for each transaction.
Nonprofits and wholesalers often get blanket exemption status after initial approval. Manufacturers and farmers may need single purchase certificates.
Common Problems With Sales Tax Exemptions
Expired Certificates
Exemption certificates must be renewed periodically, often every 1-3 years. Using an expired certificate can invalidate exemptions and lead to tax liabilities.
Updating contact details on certificates is essential. Outdated business addresses and contacts on file will impede renewal notices.
Improper Exemption Claims
Claiming exemptions without valid qualifications is illegal. For example, someone claiming a nonprofit exemption to evade taxes on personal purchases.
False exemption claims can trigger tax audits, penalties, interest charges, and even criminal prosecution for fraud depending on severity.
Failure to Pay Use Tax
If a business properly purchases equipment tax-exempt but then uses it for taxable purposes, use tax is owed on the original purchase.
Failing to pay required use tax on exempt purchases used in taxable ways is noncompliance. Retailers face audits and back taxes.
Sales Tax Exemptions for Consumers
While exemptions are more limited for individual consumers, some notable cases apply:
Medical Products
Consumers can purchase prescription drugs, eligible medical supplies, and certain medical equipment tax-exempt as needed for personal health reasons.
States like Pennsylvania exempt prosthetic aids, mobility enhancing equipment, diabetic supplies, respirators and other medical products with a prescription.
Government Assistance
Goods purchased with government assistance like food stamps (SNAP), WIC, and TANF may be exempt at point of sale in most states.
For example, Maryland exempts goods bought with WIC, food stamps, or TANF assistance. Vendors directly absorb the tax.
Membership Organizations
Some nonprofit clubs offer tax exemptions when members make purchases through the organization rather than as an individual.
For example, university sports boosters clubs may offer sales tax exemptions on tickets or gear purchased through the club.
Sales Tax Resources by State
New York
New York Sales Tax Exemptions: https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/quick_reference_guide_for_taxable_and_exempt_property_and_services.htm
NYS Tax Exemption Certificates: https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/exemption_certificates_for_sales_tax.htm
California
California Sales Tax Exemptions: http://www.cdtfa.ca.gov/taxes-and-fees/FAQseller.htm
CA Tax Exemption Certificates: https://www.cdfa.ca.gov/taxes-and-fees/faqexempt.html
Texas
Texas Sales Tax Exemptions: https://comptroller.texas.gov/taxes/publications/96-259.php
TxTaxExempt.org Exemption Search: https://comptroller.texas.gov/taxes/exempt/search.php
Florida
Florida Sales Tax Exemptions: http://floridarevenue.com/Forms_library/current/dr46nt.pdf
FL Tax Exemption Certificates: http://floridarevenue.com/Forms_library/current/dr5.pdf
Conclusion
Sales tax exemptions provide valuable tax relief on essential goods and help key industries by removing taxes from purchases of important inputs. Exemptions reduce costs for businesses and consumers in eligible categories.
However, proper documentation and qualification are required to claim exemptions legitimately. Organizations and individuals should ensure they follow all regulations to avoid problems or penalties for misuse of exemptions.
The wide variety of state sales tax exemptions means taxpayers must research the specific exemptions available to them based on their state, industry, and purchase purpose.
