The Difference between Tax Exemptions and Tax Exceptions
Though they may sound similar, when it comes to sales and use tax, tax exemptions and tax exceptions are quite different.
Every state exempts items from sales tax based on criteria set by the state in these three categories:
- the property being purchased,
- the use for the property, and
- the purchaser of the property.
Examples of Exemption Certificates for Each Type of Exemption
States require an exemption certificate for each type of exemption. For example, most states exempt purchases of prosthetic devices; however, most states require an exemption certificate when purchasing these devices. Exempt purchases of property based on use require an exemption certificate also. An example of this type of exemption would be machinery and equipment directly used in the manufacture of products for sale. Other examples may include the federal government, non-profit organizations, schools, or universities.
The Reasons for Tax Exceptions in Sales and Use Tax
There are different reasons for tax exceptions in sales and use tax. While most people use the term exemption to cover any exception that results in no tax being charged on a particular transaction, there are also exclusions. Allowable exemptions vary by state and the purchaser should provide the seller with a valid exemption certificate or documentation. A non-taxable item is excluded from the taxable base. Examples of exclusions are clothing and food in some states. A purchaser does not need to provide the seller with documentation to make a tax-free purchase of an excluded item. In addition, there are other exceptions that result in reduced rates of tax based on the type of property or how it would be used.
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