Sales Tax Exemption

Read More

Ah, exemption from sales tax! Topic of the century! It’s something that a lot of business owners like yourself are interested in and often confused by. Because nobody really likes taxes, right? Where do we start? Let’s talk about what it actually is. To understand that, we first need to take a step back and briefly talk about sales tax. Sales tax is basically a tax for consumption, and by consumption, we mean that sales tax is charged by the government whenever any goods or services are sold. Usually, the person to whom sales tax is charged is the end consumer.

You also must have heard the term “Sales and Use tax” thrown around, at least a couple of times. In case you’re wondering what that second is, use tax is basically a complementary tax you pay for the storing, using, and consuming a product or services for which you did not pay sales tax. If sales tax was charged, however, use tax would come back into the picture.

Another term that goes hand in hand with this topic, is nexus. Nexus basically refers to the connection between an authority which imposes taxes and a business. This connect triggers an obligation for collecting sales and use tax by that business. Many business are not aware of this, and end up damaging themselves in the long run. Here’s an example for the sake of clarity: someone has a big land full of apple trees. They harvest the apples every year, and sell it to a company which makes apple sauce.

The company will not be charged with sales tax because that’s not the last place where the apples are going. After the apple sauce is made, it’s sent out to stores, who are still not the end consumers and are not charged. Then the stores sell the apple sauce to you, the end consumer, and you get charged with sales tax. The amount of sales tax differs from state to state. Keep in mind that this a very simplified explanation!

Now, you’re probably thinking:

"How come the apple owner, the company, and the stores don't get charged for sales tax?"

They do this by becoming exempt from paying sales tax. And this is where the fun begins! Buckle up, cause we’re heading into the rabbit hole of sales taxes and exemption certificates!

If you’re wondering how exemption from tax works, and how businesses circumvent sales tax, the answer is pretty simple: they acquire sales tax exemption certificates. And guess what? If you’re a business owner, you can also get a sales tax exemption certificate and purchase items without having to pay sales tax. This can be particularly beneficial if you are a small business, because you can generate more income if you are tax exempt and hold a sales tax certificate of exemption. We’ll explain why in a moment.

Let’s imagine that you are a small business that plans to purchase items for reselling them to end consumers. Naturally, because the supplier you are purchasing from considers you the end consumer, they must charge sales tax to you. Why? Because they are required by law to do so. You must pay sales tax unless you present your supplier with an exemption certificate which proves that you are not required to pay sales tax and will instead collect that sales tax from the end consumer that you are reselling the product to. If you present an exemption certificate to a supplier, they must not charge you sales taxes. Instead of being double-taxed, you’ll just end up charging sales taxes to your end consumer. As you can see, this can be very beneficial, especially if you’re a small business.

"Are there any businesses that are naturally tax exempt?"

The answer is yes. There are organizations that are tax exempt by law and do not need to obtain tax exempt forms in order to avoid paying sales tax. The number of these exempt organizations is quite high. For example:

  • Charitable organizations are exempt from sales tax.
  • Same goes for religious, educational, scientific, literary organizations.
  • Cemetery organizations are also not required to pay sales tax.
  • If you are a nonprofit organization which does not distribute profit, and you’ve formed your organization for a public purpose, you will not get hit with federal income tax and you do not need to get tax exempt.

The requirements for exemption for organizations, businesses, and service can be found in detail on the IRS website. If your business, services or organizations meet that criteria, you can become tax exempt by law. It’s a given that all business are not naturally exempt organizations and many have to obtain documentation in order to circumvent taxes.

If you are not part of any exempt organizations and need an exemption certificate, you probably have a similar question in mind:

Tax Exemption for Professional Sellers

Already Have a Business?

Tax Exemption

For many sellers, including those who are relatively new to the world of ecommerce, tax exemption presents itself as an enigma of sorts. Prestige Auditors unveils that enigma, informing and assisting businesses with tax exemption and related issues. Tax exemption may feel like an uphill struggle. However, our staff at Prestige Auditors can guide you through what may seem like a tedious process.

"I am a small business owner. How can I qualify for sales tax exemptions?"

That depends on the type of your business. Obviously, if you are a manufacturer, you must not pay taxes for sale for the products that you are manufacturing, If you are a retailer and you purchase products or services in bulk for reselling to end consumers, paying these taxes is not a must for you, since the end consumers are required to pay taxes for the products or services that they consume. Plus, not all products and services can be purchased without paying taxes for sales. You must always double check with the state you are in to make sure that you are abiding by the tax regulations in that state. After you are aware of regulations, it’s time to fill out a form for sales tax exemption!

"What if I'm not a U.S. citizen, but I run a business here. Can I get tax exempt?"

Yes, you can! The IRS has got non-U.S. citizens covered by issuing a number called the ITIN. Once you get this, you will be able to file taxes, get tax-exempt, open a U.S. bank account, and a lot more. But how can you get one? Easy, just go here and the rest is on us. After we’re done and you have your ITIN, you can go ahead and start filling tax exempt forms.

"What is a tax exempt form and why do I need it?"

Tax exempt certificates or tax exemption forms are basically documents which you present to prove that your business is a reseller of products or services. Why? Let’s imagine that you are a retail business and you wish to purchase products in bulk from a supplier. If you do not present tax exempt certification to that supplier which validates that you are purchasing products for resale, you will be charged with these taxes. However, if you do present a sales tax exempt form, you will not be charged with said tax for the products that you are planning to resell, and instead will collect said tax from your end consumers. Same goes for services.

Most businesses will definitely require that you present them with your exemption certificates prior to you making a purchase from them. This is because they need to make sure that you hold exempt status, so don’t be surprised if they ask you for these when you are planning to do business with them. Taxes are pretty confusing on their own and no business wants to add to that confusion, especially since the end result might be costly for both sides! That being said, even if you do acquire this form, you need to keep in mind that not all transactions are exempt from these taxes. Every state has its own regulation and you need to update yourself with the regulations of that state that you live in to get a clearer picture of how things work.

"What happens if I don't collect these taxes as required?"

In this case, you are highly likely to be hit with state fines that can take up more than 10% of your total revenue. This might not seem much, especially if the business is big, but it can be very detrimental to any business in terms of finances. For smaller businesses, it might even signal the end of a business. That’s why every state demands that businesses who are exempt from paying sales taxes to have all the paperwork on hand in case an investigation needs to be made. If you are an online seller, you might need to create an online account which has to approved by the state in order for you to circumvent sales taxes while selling your goods online.

As you can see, exemption certificates are very useful for any business. You can get tax exemption for a lot of products and services if you hold the right sale tax exemption certificate. These documents can be extremely beneficial for you in terms of extra resources which you can use to strengthen your business,

Now that you’re aware of the importance of sales tax exemption forms and how tax exemptions work, it’s time to answer the question we know you’re dying to ask:

"How do I get exemption certificates?"

The first step you need to state is form a business that meets the criteria for obtaining this certificate. Next comes brushing up on your state regulations for taxable purchases, because we can’t stress this enough, all states have their own regulations and what works in one state might not turn out the same same in another state.

After that, you need to figure out which states you have to get tax exempt status in, especially if you are an online seller and especially if you’re using third-party marketplace facilitators like Amazon. You can do this by running a sales tax analysis of your business.

If you are located in a state that imposes sales tax laws, you can get exemption certificates through the website of your state’s revenue department. Since sales tax exemptions are fairly common and state revenue departments are so used to requests for tax exemptions at this point, they offer services for acquiring exemption certificates on their websites. That being said, the process can be a tedious one, if you didn’t know that about paperwork already!

If you have already set up your business correctly and want to obtain an exemption certificate, click here to book a call with us and figure out the tax exemption process for your business. If you’ve already picked the states you need to get tax exempt in, just let us know and we’ll take care of the rest!