Sales Tax and Tax Exempt: The Ins and Outs
Guide to Sales Tax and Tax Exemption
Sales tax is one of the most common ways for state and local governments to collect money — and it can add up to significant amounts depending on what kinds of purchases you make. However, there are situations where individuals, organizations and businesses can get a sales tax exemption. The Supplies Shops has the information you need to know about sales tax and tax-exempt status so you pay the proper amount each year.
What Is Sales Tax?
As explained by Investopedia, sales tax is a form of consumption tax that applies to the sale of products and services. It is typically a flat-rate tax paid to the seller, who then passes the money along to the jurisdiction that has levied the tax.
Currently, 45 of the 50 U.S. states along with the District of Columbia have a state sales tax. Tax rates range from 2.9% in Colorado to 7.25% in California, and some states charge different rates for different types of goods. The five states that don’t have a state sales tax are New Hampshire, Oregon, Montana, Alaska and Delaware. In 38 states, cities and local municipalities can also collect a sales tax in addition to any state taxes.
Sales Tax Exemptions
There are many situations in which you may not have to pay sales tax. Although the rules vary from jurisdiction to jurisdiction, they typically fall into four categories:
- The type of product or service being sold — Pretty much every state has at least some items that are exempt from sales tax or at least have a lower tax. Food, clothing and medicine or medical products are the most frequently exempt items.
- The point in the sales process — If a business is buying items for resale, they do not have to pay sales tax on those items. This is because the consumer will be paying sales tax later, which would amount to “double taxation” if the business also paid the tax.
- How the product is being used — States often have certain “use exemptions” to help support certain industries or activities. For example, Vermont waives its sales taxes for agricultural machinery, forestry equipment and certain wood boilers. An exemption is also usually granted if you’re purchasing materials and equipment that are predominantly used to manufacture other products.
- The type of purchaser — Nonprofit organizations such as public schools, charities, churches and first responders often get sales tax exemptions on at least some goods. Finally, states cannot legally collect a tax on any sales made to federal government agencies, and similar exemptions also frequently apply when making sales to a state or local government.
Check with your state department of taxes, local municipality or a tax attorney to see what sales tax exemptions may apply to you. Note that you may need to provide documentation for various tax-exempt purchases to qualify. If it turns out you can make certain purchases from The Supplies Shops with no sales tax, be sure to let us know before ordering.