Sales Tax Exemptions Explained!- What are sales tax exemptions?

Hi everyone!

This week’s tax tip is about exemptions. Let's start with the basics. What are sales tax exemptions? Exemption implies release or freedom from something. In this case, the "freedom" from paying sales tax.

Every jurisdiction has sales and use tax exemptions available to certain taxpayers. Some people understand exemptions in terms of exempt organizations. (i.e., who is purchasing the item). These include governmental agencies including the federal government, state governments, etc. Other exempt entities can include educational, religious, and charitable organizations.

When making sales to exempt organizations, it is important that you obtain all appropriate documentation required to substantiate the tax-free nature of the sale. On other words, if your jurisdiction requires you to obtain a certificate for the exempt organization or any other documentation, obtain the documents per their requirements.

Other exemptions are based on what is being sold and how it is being used. For example, in Texas, there are major exemptions available to manufacturers. Currently, there are exemptions on items like energy used in the manufacturing process, wrapping and packaging, etc. used by manufacturers. While, these exemptions are available to manufacturers, they may not be available to other types of businesses.

If there are applicable exemptions for your business, good for you. Use them and save a much money as you can. However, do not fall into the trap of being overly aggressive when determining what is tax exempt. Sales and use tax exemptions are narrowly construed. It is not a smart move to be overly aggressive. Research which sales and use tax exemptions are applicable. If you have questions, there are multiple resources available to help you navigate this area.

And that is your weekly tax tip. Enjoy the rest of your week!

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