Sales and Use Tax

Sales and Use Tax aims to ensure that all citizens help pay for state and local initiatives such as infrastructure, lending programs, and elder care, even if they don’t shop in-state. Sales and use taxes are also the primary sources of revenue for many municipal governments. When a taxpayer fails to file or remit sales and use taxes, it can result in substantial penalties. Fortunately, the IRS has several programs to reduce or eliminate these penalties for qualifying taxpayers, such as the Voluntary Disclosure Program and the Offer in Compromise Program.

Sale and Use Tax work like this; Typically, the seller collects the tax and remits it to the state or local government on behalf of its purchasers. In some cases, a consumer may be eligible to claim a tax exemption by submitting a certificate or other form to the state or local tax authorities. Retailers are usually required to collect sales taxes if they have a connection, known as nexus, with the state or municipality in which they operate. This can include a physical presence such as an office or warehouse, making regular deliveries by truck or van into the state or municipality, having sales representatives in the state or municipality, having affiliate nexus with another business operating in the state or municipality, or a connection established through a combination of factors, including click-through nexus, marketplace nexus or economic nexus.

Sales and Use Tax Exemption

Sales and use tax exemptions allow certain individuals, organizations, or transactions to be exempt from paying sales tax on specific goods or services. The eligibility requirements for sales and use tax exemptions vary by jurisdiction, as each state, county, or city may have its own set of rules and criteria. However, here are some common factors that can determine exemption eligibility:

Type of Entity: Certain entities, such as government agencies, nonprofits, educational institutions, and religious organizations, may be eligible for sales and use tax exemptions. These exemptions are often intended to support organizations providing essential services or fulfilling specific social or educational purposes.

Purpose of Purchase: Exemptions may be granted for goods or services purchased for specific purposes. For example, purchases made for resale, manufacturing or production, research, and development, or agricultural purposes may qualify for exemption.

Nature of Goods or Services: Some jurisdictions provide exemptions for specific categories of goods or services considered essential or in the public interest. This can include groceries, prescription drugs, medical services, educational materials, and more exemptions.

Qualifying Transactions: Exemptions can also be based on the nature of the transaction itself. For example, sales made to out-of-state customers or sales that occur in duty-free zones may be exempt from sales tax.

Required Documentation: To claim an exemption, the eligible entity or individual may need to provide specific documentation or certificates. This can include exemption certificates, resale certificates, proof of nonprofit status, or other relevant documents.

Compliance with Reporting and Documentation Requirements: Eligibility for sales and use tax exemptions often requires strict compliance with reporting and documentation requirements. Proper record-keeping and timely submission of necessary forms or certificates are essential to claim and maintain exemption status.

Renewal and Review: In some cases, sales and use tax exemptions are subject to periodic renewal or review by the tax authorities. Entities may be required to reapply or provide updated information to confirm ongoing eligibility.