Who Is Exempt, What Is Exempt, and Where Sales Tax Exemptions Are Headed
As long as there have been taxes, there have been decisions made by legislators to encourage investment in states or to provide opportunities to minimize taxes for identified taxpayers or products. In fact, in the United States, sales tax exemptions were established alongside the very creation of taxes themselves. What started as a relatively straightforward way to mitigate the risk of taxing a product multiple times across production stages has since become a challenging landscape to navigate.
Sales tax exemptions have evolved since their inception into a patchwork of state-specific rules, forms, and documentation as states leveraged these exemptions to encourage economic growth. More often than not, businesses are left asking, “Do I qualify for sales tax exemptions?” and “Which ones even apply to me?” Understanding who qualifies for a sales tax exemption and even what a sales tax exemption certificate is, even for the most tax-savvy, is a common challenge.
Who First Qualified for Sales Tax Exemptions?
Perhaps unsurprisingly, the first entity to be granted a sales tax exemption was the government itself. In McCulloch v. Maryland (1819), the U.S. Supreme Court established the doctrine of intergovernmental tax immunity, holding that states may not tax the federal government or its instrumentalities. The Court’s reasoning was straightforward: allowing states to tax federal operations would undermine federal supremacy.
McCulloch long predates the modern sales tax, but the principle it established carried forward as states began adopting consumption taxes in the early twentieth century. When states like West Virginia experimented with early sales taxes in the 1920s—and later when sales taxes spread widely during the 1930s—this constitutional limitation was already firmly embedded. States could tax private commerce, but sales made to the federal government itself were off-limits unless Congress clearly said otherwise.
Over time, the Supreme Court refined this doctrine, clarifying that the exemption applies when the federal government is the true purchaser and bears the legal incidence of the tax. In Federal Land Bank of St. Paul v. Bismarck Lumber Co., for example, the Court reaffirmed that states could not impose sales tax on transactions involving federal instrumentalities that Congress intended to shield. Conversely, the Court also made clear that federal involvement alone is not enough, as government contractors and reimbursed purchasers generally remain taxable because they are legally distinct from the government itself.
Why does a 19th-century case still matter to sales tax professionals today? Because intergovernmental immunity establishes a critical baseline: some sales tax exemptions exist not because a legislature created them, but because the Constitution requires them. That distinction explains why sales to the U.S. government remain consistently exempt across states, why documentation requirements differ from typical commercial exemptions, and why states cannot simply repeal or narrow these exemptions for revenue purposes.
Alternatively, a different path emerged for charities and religious organizations, which were the second entities to receive sales tax exemptions. While government exemptions arose from constitutional necessity, sales tax exemptions for these groups developed through state statutes and regulations because of their nonprofit nature and the public benefits they provide. States often require that these charitable organizations apply for exemption, a process that includes providing the organization’s charter, an IRS nonprofit determination letter, and other documentation serving as proof of eligibility.
This doesn’t act as a blanket exemption, though, as there are specific rules and documentation required to qualify for the exemption. Not every state has chosen to grant exemptions to these types of organization and other states have specific criteria to qualify. In Texas, for example, Evangelistic associations, missionary organizations, bible study groups, prayer groups, and revivals do not qualify because organizations that support or promote religion as an incidental part of their purpose are not eligible. Furthermore, none of the entity’s applying for these types of exemptions can have net earnings that benefit private shareholders, and the items purchased are related to the purpose of the entity. This applies to chambers of commerce, tourist promotion agencies, nonprofit youth athletic organizations (Tex. Tax Code § 151.310; 34 Tex. Admin. Code § 3.322).
What Items Were Originally Excluded from Sales Tax?
Initial sales tax laws were broad and focused almost exclusively on tangible personal property and generally not on services. You can remember it as things that you can see or touch, such as furniture, tools, and household equipment. States like Mississippi and West Virginia were among the early pioneers of the modern sales tax, applying the tax at the final point of sale to the customer.
In the beginning, exemptions largely fell into two main categories, which were necessities of life, as well as business and production inputs. Necessities of life encompassed things like grocery staple foods, designed to reduce the impact of sales tax on household basics. Notably, New York carved out this exact exemption in its 1933 sales tax law, which imposed a 1% tax on retail items but specifically exempted “food for human consumption”. New York has refined its sales tax rules for food over time, although it has generally maintained the exemption for groceries. To stay up to date on changes to sales tax exemptions, and other important sales tax news, sign up for the Sales Tax Institute’s weekly News and Tips newsletter.
Exemptions for business and production inputs originated as avenues to support manufacturing and economic development. As sales taxes first took shape, most states created exemptions for items like raw materials, machinery, equipment, fuel, utilities, and packaging materials used in the manufacturing process. In practice, the distinction between food and manufacturing exemptions has had some interesting crossover.
In a 2025 case, Kentucky Department of Revenue v. Hale, Inc., the state assessed nearly $59,000 to the Louisville business Lotsa Pasta, operating under Hale Inc. The Kentucky Department of Revenue (DOR) asserted that the salads, spreads, and Italian ices that the company produced were taxable as prepared food. However, Lotsa Pasta argued that these items fell into the state’s food manufacturing exemption (KRS 139.485). Under the exemption, food manufacturers fall under NAICS Sector 311 if the food is not sold hot or with utensils. The court ultimately ruled in favor of the company, emphasizing the value of knowing the classification of products and particulars of a state’s sales tax exemption specifics.
Where Are States Expanding or Rolling Back Exemptions?
While many states continue to expand exemptions for essentials, there is a countertrend of “base broadening”. Historically, services were almost entirely exempt since the U.S. economy primarily focused on the manufacture and sale of physical goods. Today, states are gradually expanding their sales tax base to include more types of services, particularly repair, installation, and maintenance of tangible goods, as well as certain personal and professional services.
For states like Hawaii, New Mexico, South Dakota, and West Virginia, services are taxed by default unless specifically exempt. Outside of the states that don’t charge sales tax, services must be enumerated by the state to charge sales tax. The first wave of states taxing services came in the 1960s, with services to tangible personal property having their status changed to taxable under the notion that the labor was part of the product’s sale. This included things like car repairs, laundry, and dry cleaning. The second wave, starting in the 1990s, had states adding discretionary services like landscaping, janitorial services, and pet care services to the sales tax base.
Perhaps the biggest change to how services are taxed is the way that the sales tax base has crept into the digital landscape. Familiar with being at the forefront of tax change, Maryland has found itself in the spotlight with how it taxes digital goods and services. Effective July 1, 2025, software-as-a-service (SaaS) taxability changed based on the end user. For individual use, it falls under the category of “digital product” and is subject to the state’s standard 6% sales tax. For commercial, or B2B use, it is considered a software publishing service that is taxed at a reduced 3% rate. This rule applies to software utilized in cloud computing, data processing, hosting, and computer system design.
Sales tax exemptions for AI services and data centers are also changing rapidly as states modernize their tax bases. In many jurisdictions, long‑standing exemptions for data center infrastructure and emerging AI‑related services are being narrowed or rolled back, forcing businesses to closely reevaluate their exemption strategies. These shifts have elevated the importance of multiple points-of-use certificates, which play a critical role for AI platforms and data centers operating across multiple states. To understand how these developments affect exemption planning and compliance, including what businesses should be watching next, register for the Sales Tax Institute’s April webinar.
How Can Businesses Keep Up with Exemption Changes?
Sales tax exemptions have always reflected the economic priorities of their time, and today’s rapid changes show just how fluid those priorities have become. What began as narrow carveouts to prevent double taxation has grown into a complex, state‑specific framework that both grants relief and introduces risk for businesses navigating it.