Sales tax exemption criteria

It is impossible to list all the products or services exempt from sales tax because the exemption list would include thousands of items. Additionally, the list of tax-exempt products constantly changes.

It is also important to note that there is no single exemption list but rather 50 different lists—one for each state—since sales tax is managed at the state level in the U.S. As a result, a product may be exempt from sales tax in one state but not in another, making it impractical to compile a comprehensive list of all exemptions.

Instead, it is more useful to analyze the general criteria that determine whether a product or service is classified as sales tax-exempt. Sales tax exemptions vary by state, but in general, they fall into three main categories:

Exemption based on the type of goods sold

Some of the most common tax exemptions include:

• Food products, although prepared foods are often taxable.
• Clothing: Some states exempt clothing or apply a reduced tax rate, sometimes within specific price limits.
• Prescription drugs: Generally exempt from sales tax.
• Medical devices

Some states do not offer a complete exemption but apply a reduced sales tax rate.

Exemption based on the type of buyer

Certain buyers may qualify for a sales tax exemption due to their status or function. The primary exempt categories include:

• Federal government
• State and local government entities
• Nonprofit organizations

Exemption based on the use of the product

Some exemptions are designed to support specific industries or promote activities deemed in the public interest. The most relevant include:

• Agriculture: Products or equipment used in food production.
• Manufacturing industry: Machinery and equipment used in production activities are often exempt from sales tax.

Proof of sales tax exemption eligibility

For exemptions based on the type of buyer or the use of the product, it is the buyer’s responsibility to prove their eligibility for exemption. In other words, a seller cannot refrain from collecting or remitting sales tax without valid proof that the product is exempt. Documentation to support tax exemption status generally includes:

• Exemption Certificate
• Resale Certificate

ExportUSA provides a comprehensive sales tax management service to help businesses avoid costly errors. We also offer initial consulting to determine whether your products or services are subject to or exempt from sales tax in different states.