Common Exemptions
In every state that imposes a sales tax, the general rule is that each retail
sale of tangible personal property is presumed to be taxable. In other
words, if you happen to make retails sales, you generally must collect
or pay sales tax with respect to each sale unless you can show that the sale
was somehow exempt from tax,
Types of exemptions. Each state offers its own unique set of
exemptions from its sales tax. In general, exemptions are provided on the basis
of the type of property being sold, the identity of the purchaser, or the use to
which the property will be put.
- Purchaser-based exemptions - under federal law, states are
prohibited from taxing sales that are made to the federal government or its
various agencies. Similar exemptions exist in each state, with the exception
of California, for sales to the state and its agencies and to cities,
counties, and other local jurisdictions in the state. Also common are
exemptions for sales to nonprofit charitable, religious, and educational
organizations.
- Property-based exemptions - every state recognizes that there are
certain commodities that individuals must purchase to subsist. Accordingly,
most states offer product-specific exemptions for items such as food,
clothing, prescription medicines, and medical (prosthetic) devices.
- Use-based exemptions - the exemptions that fall into this category
are those that are provided to support certain industries (such as
agriculture, manufacturing, or industrial processing) or to encourage
certain activities for the public good (such as industrial development or
expansion or pollution control). For example, many farming states offer
exemptions for sales of products or equipment that are used to produce food
for human or animal consumption. Similarly, most states offer exemptions for
sales of materials or supplies that are used in manufacturing a product for
sale.
However, every state allows two distinct exemptions that do not fit neatly
within these categories:
Except with respect to property-based exemptions, entitlement to which will
be established by the property itself, a purchaser bears the responsibility for
affirmatively showing that a particular purchase is exempt from tax. Or, looking
at the transaction from the other side of the counter, a seller cannot refrain
from collecting or paying tax on a sale unless the seller believes in good faith
that the sale is exempt. Meeting the requisite level of proof is generally a
matter of the purchaser providing the seller with one of the following: