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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 retail 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.
- 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; those that don't provide a complete exemption often tax these necessities at lower rates than the general retail rate.
- 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 most states 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.
- 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 machinery and equipment used in manufacturing a product for sale.
However, nearly every state allows two distinct exemptions that do not fit neatly within these categories:
- Sales for resale are generally exempt.
- Occasional sales by those who have minimal sales each year are exempt. (Note, Colorado, Oklahoma and Wyoming do not exempt occasional sales from sales tax.)
Except with respect to property-based exemptions, the 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:
- an exemption certificate that documents the exemption the purchaser is claiming
- a direct payment certificate that shows the purchaser is permitted to pay taxes directly to the state