Sales tax exemptions remove the tax from purchases that would otherwise be taxable, either because of who is buying or what is being bought. Nonprofits, government agencies, and businesses buying inventory for resale are the main categories of exempt buyers. Groceries, prescription drugs, and farm inputs are the most common categories of exempt goods. In almost every case, claiming the exemption requires giving the seller a valid exemption certificate at the time of purchase.
Combined state and local sales tax rates run from zero in the five states with no sales tax to more than 10 percent in the highest-tax jurisdictions, so the savings can be meaningful. What qualifies and what paperwork you need depends on the type of exemption and the state.
Who Qualifies as an Exempt Buyer
Three groups account for most exempt purchases: qualifying organizations, government entities, and businesses buying for resale.
Nonprofits with federal 501(c)(3) recognition are the most familiar example, since their operations serve charitable, educational, religious, or scientific purposes rather than private profit.1Office of the Law Revision Counsel. 26 U.S. Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. Here is the trap that catches many of them: 501(c)(3) is an income tax exemption granted by the IRS. It does not automatically exempt an organization from state sales tax. Most states require a separate application through their department of revenue, and a few states offer no sales tax exemption to nonprofits at all. An IRS determination letter alone is not enough at the register, and assuming otherwise can produce back taxes and penalties during an audit.
Federal, state, and local government agencies generally qualify, which avoids one arm of government paying tax revenue to another. Educational institutions, from elementary schools to universities, usually qualify under either the government or nonprofit umbrella.
Businesses participate through a different mechanism: the resale certificate. When a retailer buys inventory it intends to resell, that purchase is not taxed. Sales tax is collected once, at the final sale to the end consumer, so the same item is not taxed at every step of the supply chain.
What Goods and Services Are Commonly Exempt
Many exemptions turn on what is being purchased rather than who is buying. These vary by state, but a handful of categories show up almost everywhere.
Food and Groceries
Most states exempt unprepared grocery food. Bread, milk, eggs, fruits, and vegetables typically carry no sales tax when bought at a grocery store. Prepared food, restaurant meals, and items sold hot or ready to eat are usually taxable even in states that exempt groceries. Around ten states still tax groceries to some degree, sometimes at a reduced rate.
Prescription Drugs and Medical Devices
Prescription drugs are exempt in nearly every state that imposes a sales tax. Most states extend the exemption to durable medical equipment like wheelchairs, prosthetic limbs, and oxygen equipment. Over-the-counter medications get less consistent treatment, with some states taxing them and others offering a full or partial exemption.
Agricultural and Manufacturing Inputs
Farming equipment, livestock feed, seed, and agricultural chemicals are exempt in most states. The same logic covers raw materials that become part of a manufactured product: if a component is physically incorporated into something that will later be sold, many states treat that component as exempt because the finished product will be taxed at final sale.
Services
Services are one of the messiest areas of sales tax law. Many states tax tangible goods but leave most services untaxed, so you might pay tax on a replacement car part but not on the mechanic’s labor to install it. Other states tax a broad range of services, and some tax only specific categories. The line between a taxable good and an exempt service gets blurrier as more of the economy shifts to digital delivery.
Digital Goods and Software
Whether you owe sales tax on a software subscription, a digital movie, or a downloaded game depends heavily on the state and how the product is delivered. Off-the-shelf versus custom-built software, permanent license versus subscription, and electronic versus physical delivery can all change the answer. Cloud-based software sold as a subscription is especially contentious: some states treat it as a taxable product, others as an exempt service. Multiple states expanded taxation of digital goods and software as a service in 2025, and more changes are expected. For anything sold or bought across state lines, professional tax advice pays for itself quickly.
Sales Tax Holidays
About 20 states run temporary sales tax holidays each year, most often timed around back-to-school shopping in late July or August. During these windows, specific categories of goods become tax-free, but only if each item falls below a price cap.
- Clothing and footwear, often exempt up to $100 per item, though some states set the cap higher or lower.
- School supplies, usually exempt up to $30 to $50 per item.
- Computers and electronics, with caps that range widely, from $750 to $1,500 or more depending on the state.
- Emergency preparedness supplies, covered by separate holidays in several hurricane-prone states for generators, batteries, and weather-related items.
The price cap is a cutoff, not a deduction. If your state exempts clothing under $100 and you buy a $99 shirt, the whole purchase is tax-free. Buy a $101 shirt and you pay tax on the full amount. Retailers generally program the holiday into their systems, but check the receipt.
How to Claim an Exemption: The Certificate
If you qualify as an organizational buyer or a reseller, you document your status with an exemption certificate. The certificate is what protects the seller, and without a valid one on file, the seller has no defense if an auditor later challenges the untaxed sale.
What Goes on the Certificate
Exemption certificates typically ask for the organization’s legal name and address, a taxpayer or employer identification number, the reason for the exemption (resale, nonprofit status, government entity), and the signature of an authorized representative. The reason has to match a recognized category under the state’s tax code. A mismatch, an outdated identification number, or a signer who has left the organization can invalidate the certificate during a future audit. Verify your details against your state registration and IRS determination letter before handing paperwork to a vendor.
Blanket vs. Single-Purchase Certificates
If you buy from the same seller repeatedly, a blanket certificate covers all qualifying future transactions with that vendor. A single-purchase certificate covers one transaction. Most states allow blanket certificates for resale and organizational exemptions. If your address, identification number, or exemption status changes, you must provide the seller with an updated certificate, and the seller can request an updated one at any time.
Multistate Forms
Businesses that buy across state lines can sometimes use standardized forms. The Streamlined Sales Tax Exemption Certificate is accepted by all 24 member states of the Streamlined Sales and Use Tax Agreement, though not every exemption type is available in every state.2Streamlined Sales Tax. Exemptions The Multistate Tax Commission publishes a Uniform Sales and Use Tax Resale Certificate that 36 states accept for resale purchases.3Multistate Tax Commission. Uniform Sales and Use Tax Resale Certificate These do not replace state-specific certificates for every situation, but they cut down the paperwork for multistate operations.
How Long Certificates Last
Some certificates remain valid indefinitely as long as the underlying exemption status has not changed. Others must be renewed on a set schedule, typically every one to five years depending on the state and exemption type. Review your certificates at least once a year, even where renewal is not required, to make sure the information is still accurate.
Use Tax: The Obligation Most Buyers Overlook
Sales tax has a less famous counterpart called use tax, and ignoring it is one of the most common compliance failures. Use tax applies when you buy something without paying sales tax at the time of purchase and then use, store, or consume it in a state that imposes sales tax. The classic scenario is buying from an out-of-state seller that does not collect your state’s tax.
The use tax rate is almost always identical to the sales tax rate. If your state charges 6 percent and you buy equipment online from a seller that does not collect it, you owe 6 percent use tax directly to the state. Many states include a use tax line on the individual income tax return, and businesses are generally expected to self-report and remit on a regular schedule.
This matters for exemptions in a specific way. If you buy something on a resale certificate and then divert it to personal use, you owe use tax on it. The exemption applied only because you represented the purchase as being for resale, and states audit for exactly this kind of conversion.
The 2018 Supreme Court decision in South Dakota v. Wayfair expanded the ability of states to require out-of-state sellers to collect sales tax, which has reduced the number of situations where a buyer owes use tax on an online purchase.4Supreme Court of the United States. South Dakota v. Wayfair, Inc. The obligation has not disappeared. Purchases from sellers below a state’s collection threshold or from overseas vendors can still generate use tax.
Penalties for Misusing an Exemption
Using an exemption certificate fraudulently carries real consequences. The most common form of misuse is a business owner using a resale certificate for personal purchases with no intention of reselling. That is tax evasion, and states treat it seriously.
Civil penalties for filing a false or fraudulent certificate typically include a per-document fine plus the full amount of tax that should have been collected, and sometimes a 100 percent penalty on top of that. Criminal penalties for deliberate fraud can include fines and imprisonment, with severity varying by state. Both the buyer who presents the fraudulent certificate and the seller who knowingly accepts one can face liability.
Unintentional misuse creates problems too. If your organization’s exempt status expires or is revoked and you keep using the old certificate, transactions after that change are taxable, and the state can pursue the uncollected tax from either side of the sale. Keeping certificates current is how you avoid being the party assessed back taxes, interest, and penalties years later.