Export Exemption from Sales and Excise Tax: Forms 637 and 720

To claim an export exemption from sales and excise tax, a manufacturer or seller must sell qualifying goods to a buyer who will export them, collect specific proof that the goods actually left the country within six months of the sale, and — for state sales tax — hold a valid exemption certificate from the buyer at the time of sale. The federal excise exemption sits in 26 U.S.C. § 4221; state sales tax rules vary but follow the same underlying logic. Skip a step and the tax comes back, with interest.

The reason the exemption exists at all is constitutional. Article I, Section 9, Clause 5 bars Congress from taxing “Articles exported from any State,” and Article I, Section 10, Clause 2 restricts states from imposing duties on exports without congressional consent.¹ Consumption taxes are supposed to land where the final consumer lives, not on goods leaving the country.

What Qualifies as a Tax-Free Export Sale

Under 26 U.S.C. § 4221(a)(2), a manufacturer can sell an article free of Chapter 32 excise tax when the buyer purchases it for export, or when the buyer will resell it to a second purchaser who intends to export it.² The chain stops there. A manufacturer cannot sell tax-free to a buyer who plans to resell to a second party, who then resells to a third for export. That extra link breaks the exemption.³

Goods must actually leave the country, not sit in domestic warehousing with export as a stated intention. If goods get diverted to a U.S. buyer, the exemption fails regardless of what the original paperwork said. When an intermediary is involved, the manufacturer needs assurance the intermediary is bound to export the goods or to sell them only to someone who will.

The Six-Month Proof Deadline

This is where most exemption claims collapse. The manufacturer must receive proof that the goods were actually exported within six months of the sale date or the shipment date, whichever comes first. Miss that window and the exemption disappears. The manufacturer then owes excise tax at the rate that applied on the original sale date, calculated as if the goods were sold on the day the deadline expired.²

The deadline applies even when the goods were genuinely exported and the paperwork was just slow returning. Build the intake process around collecting proof well before month six, not on month six.

State Sales Tax Mechanics

Nearly every state with a sales tax exempts goods sold for export, but the mechanics differ. Some states require the goods to leave the state as part of a continuous journey abroad. Others focus on where title transfers. Most require the buyer to provide an exemption certificate stating the goods are being purchased for export, along with a foreign address or equivalent identification. Certificates typically need to be on file before or at the time of sale, not gathered later. If a certificate turns out to be invalid or incomplete, the seller is generally liable for the uncollected tax. Check with your state’s department of revenue for the exact form and filing details.

Proof of Export the IRS Will Accept

Federal regulations accept five forms of proof that goods actually left the country:³

A copy of the export bill of lading issued by the delivering carrier, showing the goods were loaded for a foreign destination.
A carrier certificate: a written statement from the export carrier’s agent confirming actual exportation.
A foreign customs landing certificate signed by a customs officer in the destination country.
A statement from the foreign consignee confirming receipt, used when the destination country has no customs administration.
A signed statement on official letterhead from a U.S. government department or agency, when that agency handled the export and cannot provide any of the above.

When the manufacturer isn’t the one doing the exporting, there’s another layer. The manufacturer needs a written statement from the buyer confirming the goods were exported or were sold to someone who exported them. That statement must describe which type of proof from the list above is available and where it can be inspected.³

AES Filings When Required

Separate from tax proof, exporters must file Electronic Export Information through the Automated Export System when a shipment’s value exceeds $2,500 per commodity classification, or when an export license is required.⁴ AES generates an Internal Transaction Number that must be provided to the export carrier. Filing deadlines depend on the mode of transport:⁵

Vessel cargo: at least 24 hours before loading at the U.S. port.
Air cargo: at least 2 hours before scheduled departure.
Truck cargo: at least 1 hour before the truck arrives at the U.S. border.
Rail cargo: at least 2 hours before the train reaches the U.S. border.

How to Actually Claim the Exemption

Register on Form 637

Companies that regularly sell or buy goods subject to federal excise tax on a tax-free basis must register with the IRS on Form 637. Registration is a prerequisite for selling or buying tax-free under Section 4222 and for filing refund claims.⁶

Report Quarterly on Form 720

Federal excise taxes are reported quarterly on Form 720. Exporters who sell goods tax-free report those transactions, and Schedule C is used to claim credits for excise tax already paid on goods that were subsequently exported. For exported taxable fuel, the claim must include proof of exportation matching the categories above.⁷

Refunds When Tax Was Already Paid

Sometimes excise tax gets paid upfront and the goods are exported afterward. Under 26 U.S.C. § 6416, tax paid on an article that is subsequently exported counts as an overpayment and can be refunded or credited, as long as the export happens before the goods are put to any other use in the United States.⁸ If the person who paid the tax is not the exporter, the exporter or shipper can receive the refund directly, but only if the original taxpayer waives the claim to it.

State Returns

On state returns, the seller reports total gross receipts and deducts export sales as exempt, backing up the deduction with the exemption certificates on file. The certificate must be complete before an audit, not assembled after one begins.

Screening Buyers Before You Sell

A tax exemption means nothing if the export itself is illegal. Before completing any export sale, screen the buyer, the consignee, and any other party against federal restricted-party lists. The government maintains a Consolidated Screening List drawing from Commerce, State, and Treasury, including the Denied Persons List, the Entity List, and the Specially Designated Nationals List.⁹ The Bureau of Industry and Security requires exporters to conduct their own due diligence beyond checking the published names. Red flags like an unusual shipping route, a customer who declines to state end use, or a delivery address that doesn’t match the buyer’s business warrant investigation before shipping.

OFAC administers dozens of active sanctions programs, including comprehensive sanctions on countries such as Cuba, Iran, North Korea, and Russia.¹⁰ Exporting to a comprehensively sanctioned destination without an OFAC license is a separate violation with its own severe penalties, apart from any tax consequences.

Recordkeeping

Federal regulations require all parties to an export transaction to keep documents for at least five years from the date of export. That applies to manufacturers, foreign principals, authorized agents, and export carriers. If another agency imposes a longer retention period for the type of goods involved, the longer period controls.¹¹

For IRS purposes, records supporting excise tax exemptions and credits should be kept for at least as long as the IRS can assess additional tax. The standard assessment period is three years from the filing date, extending to six years when income is substantially understated. Given the Commerce Department’s five-year rule, keeping everything for at least five years is the safe floor. Digital records are acceptable, and the IRS routinely works with electronic accounting records during examinations.¹²

What Getting It Wrong Costs

Companies required to register on Form 637 that fail to do so face a civil penalty of $10,000 for the initial failure, plus $1,000 for each additional day they remain unregistered. Penalties apply separately for each activity requiring registration. A reasonable-cause exception exists, but the burden is on the taxpayer to prove it.¹³

Failing to file EEI in AES can result in a civil penalty of up to $10,000 per violation. Late filings carry penalties of up to $1,100 per day of delinquency, capped at $10,000 per violation. Filing false or misleading export information is a separate violation, also up to $10,000 per occurrence. These amounts are adjusted annually for inflation.¹⁴

The buyer statements certifying intent to export carry a warning: fraudulent use exposes all parties involved to a fine of up to $10,000, imprisonment for up to five years, or both.³ Willfully attempting to evade federal excise taxes is a felony, punishable by a fine of up to $100,000 for individuals or $500,000 for corporations, imprisonment for up to five years, or both, plus the costs of prosecution.¹⁵ Claiming export exemptions on goods you know will stay in the United States is exactly the conduct that triggers these charges.

Even without criminal exposure, a failed exemption claim means the seller owes the full tax retroactively. If the six-month proof deadline passes without documentation, the tax is calculated at the original sale rate and assessed as though the sale happened on the day the deadline expired.³ Interest and additional penalties compound from there. Treat documentation as a non-negotiable part of every export sale, not a task to circle back to later.

1
Legal Information Institute. US Constitution Annotated – Article I, Section 9, Clause 5 – Prohibition on Taxes on Exports
2
Office of the Law Revision Counsel. 26 USC 4221 – Certain Tax-Free Sales
3
eCFR. 26 CFR 48.4221-3 – Tax-Free Sale of Articles for Export
4
International Trade Administration. Electronic Export Information (EEI)
5
eCFR. 15 CFR 30.4 – Electronic Export Information Filing Procedures
6
Internal Revenue Service. 637 Registration Program
7
Internal Revenue Service. Instructions for Form 720
8
Office of the Law Revision Counsel. 26 USC 6416 – Certain Taxes on Sales and Services
9
Bureau of Industry and Security. Guidance on End-Use and End-User Controls and US Person Controls
10
U.S. Department of the Treasury. Sanctions Programs and Country Information
11
eCFR. 15 CFR 30.10 – Retention of Export Information and the Authority to Require Production of Documents
12
Internal Revenue Service. Use of Electronic Accounting Software Records – Frequently Asked Questions and Answers
13
Office of the Law Revision Counsel. 26 USC 6719 – Failure to Register or Reregister
14
eCFR. 15 CFR Part 30 Subpart H – Penalties
15
Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax