Key Takeaways

  • A tax exempt certificate allows qualified buyers to make purchases without paying sales tax.
  • These certificates are typically used by resellers, manufacturers, nonprofits, and government agencies.
  • Each U.S. state has its own exemption rules, forms, and documentation requirements.
  • Certificates must be properly completed and presented at the point of sale.
  • Many certificates have expiration dates and must be renewed to remain valid.
  • Sellers are responsible for maintaining accurate exemption records to avoid tax liability.

A business tax exempt certificate, also referred to as a sales tax exemption certificate, is documentation that allows for purchases to be made tax-free. Typically, a purchaser will present a tax exempt certificate to the seller, who in turn will sell goods or services without charging sales tax.

Sales Tax Exemptions

Business owners who maintain a physical presence in any state must register to collect sales tax if they are generating sales on taxable goods. To clarify, a business owner must collect sales tax on any sale in the state where the entity is registered, unless a valid exemption is applied. There may be certain sales tax exemptions based on the nature of the item being sold or the purchasing entity.

Who Needs a Tax Exempt Certificate

A tax exempt certificate is typically required by:

  • Nonprofit organizations, such as charities and religious institutions, that qualify for exemption under state or federal law.
  • Resellers, who purchase items with the intention of reselling them to end users.
  • Government entities, including federal, state, and local agencies.
  • Manufacturers or producers, when purchasing raw materials used in production.
  • Educational institutions, depending on state-specific rules.

Each entity must provide documentation that aligns with state guidelines to prove eligibility. Sellers are not required to accept an exemption unless the documentation is valid and complete.

Common Types of Exemptions

There are many forms of tax exemptions, but one thing they all have in common is that they entirely eliminate or reduce the obligation to pay tax. Common types of tax exemptions include:

  • Type of good: There are items that may be legally exempt from tax, including specific services, intangibles like digital goods, and real property. Some goods often are exempt from sales tax or are taxed at a lower rate. These types of tax exemptions don‘t require any formal documentation. For example, goods of necessity are services and products that consumers must buy regardless of income level. Necessity goods may include such items as:
    • Food
    • Medicine
    • Clothing
    • Water
  • Type of use for goods sold: Resale exemptions occur when products are resold in the same condition in which they are purchased. Additionally, tax exemptions may be allowed when goods are either processed or made into other goods prior to resale. Certain industries have special tax exemptions including manufacturing, agricultural, and industrial processing.
  • Type of purchaser: Any goods that are sold to the federal government cannot be taxed. Similarly, tax exemptions may also be available to the following agencies:
    • State and local governments
    • Nonprofit organizations
    • Religious, education, or charitable groups

Required Information on a Tax Exempt Certificate

A valid tax exempt certificate generally includes:

  • Name and address of the buyer
  • Type of exemption being claimed
  • Description of the purchased goods or services
  • Seller’s name and address
  • Signature of the buyer or an authorized representative
  • Date of issuance
  • Tax ID or exemption number (if applicable)
  • Expiration date (required in many states)

The exact information may vary by state, but incomplete or incorrect certificates could be rejected or trigger tax liability for the seller.

Exemptions for Resellers

Resale exemption is the most common type of exemption. Resale exemption occurs when goods are purchased and then resold in the same form in which they were originally bought. Later, when a reseller sells the goods at the full-selling price, they are required to collect sales tax.

Once a seller receives a sales tax registration number, they can begin collecting sales tax. A sales tax registration number is needed to complete a resale certificate which will be presented to suppliers. States that allow for resale exemptions require proof of a state-issued resale certificate. Additionally, some states accept a multi-state resale certificate that can be issued by the Multistate Tax Commission (MTC).

It is important for resellers to be aware of the rules and limitations surrounding resale exemptions. Remember, in order to properly use a resale certificate, purchased merchandise must be resold by the business. To clarify, if a company purchases items tax free and later consumes or uses those items, that company will now owe tax on those purchases as the end consumer.

In this scenario, the tax is referred to as “use tax.” At the time of sale, a purchaser should never sign a resale certificate if they do not know whether the goods will be resold or used for another purpose.

Multistate Certificates and the Streamlined Sales Tax Project

Some states participate in the Streamlined Sales and Use Tax Agreement (SSUTA), allowing sellers and buyers to use a uniform Multistate Exemption Certificate. This is especially helpful for businesses operating across multiple jurisdictions.

While many states accept this form, others still require their own documentation. Always confirm with each state’s department of revenue to avoid compliance issues.

Exemptions for Drop Shipments

Drop shipping occurs when retailers do not keep items in stock, but rather transfer customer orders and shipment information to a wholesaler, manufacturer, or another retailer. The goods are then shipped directly to the customer. This method is often referred to as supply chain management.

Drop ship taxation can be very complicated. Often a retailer is not registered in the state where the goods are being shipped to, but the shipper or supplier is. If a seller has a presence in a state and is registered to charge sales tax, they must collect sales tax on every taxable sale that is delivered into the state.

Do Tax Exempt Certificates Expire?

Yes, in many states, tax exempt certificates have expiration dates—typically ranging from one to five years. After expiration, a new certificate must be submitted.

States like Florida, Illinois, and Texas require regular renewals. Sellers should implement a system to track expiration dates and request updated certificates to avoid penalties.

Exemptions For Manufacturers (or Purchasers of Raw Materials)

To qualify for a tax exemption, it is the responsibility of the purchaser to prove that they properly meet exemption requirements. Typically, this means having the appropriate documentation to meet each state's requirements. In most cases, an exemption certificate is necessary to prove meeting tax exemption requirements. Retailers must request and retain a copy of a purchaser's exemption certificate. If documentation is not presented, then the sale must be deemed taxable.

State-by-State Rules for Exemption Certificates

Each state sets its own rules for tax exempt certificates, including:

  • Accepted forms (some require a state-specific form)
  • Use of blanket vs. single-use certificates
  • Renewal and expiration policies
  • Digital submission and storage protocols

Refer to the state department of revenue for official exemption guidance. Maintaining compliance with each state’s laws is essential, especially for businesses operating nationwide.

Frequently Asked Questions

  1. What is a tax exempt certificate used for?
    A tax exempt certificate allows qualified buyers to purchase goods or services without paying sales tax, usually for resale, manufacturing, or exempt organizational use.
  2. Who can issue a tax exempt certificate?
    The buyer (such as a nonprofit, reseller, or manufacturer) completes and issues the certificate to the seller, affirming eligibility for the exemption.
  3. Does a tax exempt certificate expire?
    Yes, many states require periodic renewal—typically every 1 to 5 years. Sellers should verify expiration dates and request updated certificates as needed.
  4. Can I use one certificate in multiple states?
    Possibly. The Streamlined Sales and Use Tax Agreement allows use of a multistate certificate in participating states. Others require state-specific forms.
  5. What happens if a seller accepts an invalid certificate?
    The seller may become liable for unpaid taxes, interest, and penalties. It’s critical to verify the validity and completeness of all certificates received.

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