An Overview of Tax Exemptions
As you may have noticed, taxes are pretty complicated. With roughly 14,000 jurisdictions to manage and over 200,000 tax laws to keep up with, it’s not an easy subject to master. In addition to the confusion that comes with determining what to tax, what the correct tax rate is, which states get what, and what the heck nexus is, you have a couple other things to consider. In particular, tax exemptions.
Tax exemptions are items you are not required to tax. Sounds simple enough, but in true form, it can be pretty complex. We’re going to dive into these exemptions today. If you have specific questions, let us know! Our army of tax attorneys is happy to help. Tax exemptions exist for public policy purposes. These are applied for a number of reasons, often in an attempt to incentivize consumer spending. Exemptions look different across the United States, but there are some general commonalities throughout. These exemptions can result in complete exclusion from a tax or a discounted tax rate on the item.
Exemptions are based on entity, use, or item.
- Entity: The type of organization you are can determine if you have to pay sales tax. Government entities, religious organizations, or educational institutes may be exempt from sales tax on certain purchases or services. When a school buys crayons or educational supplies, they often don’t have to pay taxes on those purchases.
- Use: Sometimes, the use of a purchased product or service can result in tax exemption for a business. One example is electricity purchased for use in manufacturing. This is often exempt from sales tax. Another common use exemption occurs with products that will be resold. Let’s say you make and sell RVs. If you buy a microwave to put in that RV, which will then be sold to the end consumer, you typically don’t have to pay the tax on that microwave.
- Item: There are certain products exempt from sales tax in many states. Food, medical supplies, and newspapers are the most common categories of tax exempt products. Additionally, certain services are sales tax exempt. In Nevada, for example, certain utilities, like gas, electricity, and water, are tax exempt when delivered to consumers through city infrastructure, like lines or pipes. Exemptions based on product and service type get tricky. Food is exempt, but the lines get blurry when determining what exactly food is. Do regulators consider energy drinks food? What about Dunkaroos? Typically, if a food is available with food stamps, it’s likely sales tax-free.
How it relates to you:
If you think your eCommerce store sales products that are tax exempt, you’ll want to do a little digging to make sure. Reach out to specific states in which you owe sales tax and see what their exemptions are, and if your product is included. If you determine your products are sales tax exempt, you’ll (generally) need to obtain a valid exemption certificate. This documents your entitlement to the exemption, and will keep auditors happy, should you ever get audited.
For eCommerce Businesses:
Fortunately, Amazon has you covered when it comes to sales tax exemptions. After you assign your product tax code within Amazon, it tracks the exemptions between the states. If you’re using a different eCommerce platform, you’ll likely need to determine the product tax rate and manually track it within your system. You can also use Taxify to bulk exempt products across store platforms, which can save you the time of having to manually track yourself. Sales tax exemptions are an important thing to keep track of for your eCommerce business. Charging taxes you don’t need to pay is bad for you and your customers, and increase the likelihood of an audit. These exemptions are tricky though, so set aside some time to do some digging and see if your product is exempt. Have questions? Give us a shout. Our army of tax attorneys is ready to help!
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