What is an Exemption Certificate and Who Can Use One?
Sellers are required to charge sales tax on all transactions subject to tax except when a jurisdiction’s rules allow for the sale to be made tax-exempt. An exemption certificate is the form presented by an exempt organization or individual to the seller when making a tax-exempt purchase.
Exemptions are based on the customer making the purchase and always require documentation. Different purchasers may be granted exemptions under a state’s statutes. There are different types of exempt organizations.
The Federal Government is an exempt organization. States are prohibited from taxing direct sales to the Federal Government. Some states specifically include an exemption for sales to the Federal Government. Others simply exempt sales that they are prohibited from taxing under the U.S. Constitution.
State and local governments are sometimes exempt organizations. States are free to provide exemptions to state and local governments. Not all states provide an exemption for sales to themselves. Government contractors may also qualify for exemptions.
States are free to choose whether to tax non-profit organizations and charitable organizations. Certain requirements must be met for an organization to qualify for a sales tax exemption. Many states tie their exemption to federal provisions under Section 501 of the Internal Revenue Code. Other states tie their exemption determination to the purpose of the organization (i.e. charitable, religious, educational, not-for-profit).
For most states that grant an exemption to non-profit organizations, the exemption is for purchases of items used in conducting exempt activities. If the organization makes sales that compete with for-profit companies, their sales are often either subject to sales tax when sold or taxable when purchased. Examples of potentially exempt organizations are schools, churches, non-profit hospitals, charitable organizations, and PTAs.
Note that the renewal period of exemption certificates varies by state and by type of exemption. Some states’ exemption certificates do not expire. Other states’ certificates expire within a set period of time.
Looking for more information? Check out the following resources:
- Download our Important Concepts in Sales Tax Administration whitepaper to learn about best practices for exemption certificates
- Learn about resale certificates with our What is a Resale Certificate and Who Can Use One? FAQ
- Learn essential sales tax concepts with our Sales Tax 101 webinar on-demand