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What is a Sales Tax Certificate?

By Kathy Heydasch
Updated May 17, 2024
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A company that buys and re-sells products is exempt from paying sales tax on those products according to the US tax codes. In order to avoid sales tax, a company must apply to their state department of revenue collection in order to obtain a sales tax certificate which exempts the payment of those taxes. Products exempt from sales tax are items which are bought and resold, as well as component items which are assembled and then sold to consumers. The sales tax certificate will specify whether items are bought and resold or instead bought and assembled and then resold.

A consumer that purchases a finished good or service typically pays a state sales tax, although some states have no sales tax and do not require a sales tax certificate. State sales taxes are collected by the seller and submitted to a state agency. In order to be exempt from state sales tax, one must provide a sales tax certificate issued by the state in which the company office is located. This sales tax certificate is then provided as proof that a company is exempt from paying state sales tax.

Since sales tax is imposed at the point of sale, most companies do not charge sales tax to out-of-state customers unless the customer has an office within the state. This has become a large controversy with the abundance of online ordering. E-commerce has presented a problem for state sales tax collection agencies since orders are shipped out of state without first being taxed. There is little federal enforcement to provisions which call for all orders to be charged state sales tax.

There is currently no US federal sales tax, and some proposed alternatives to sales tax exist, including the FairTax. The FairTax seeks to replace federal income taxes with one fixed percentage or sales tax to be charged by the seller, collected and sent to the US government. Other tax alternative plans include the Flat Tax and the Value Added Tax (VAT).

Many other countries have VATs and these fees are assessed at every point during the manufacturing process. In some cases and countries, VATs replace traditional sales taxes, but in others they are simply an additional tax that manufacturers have to pay and pass on to the end consumers. The US legislature has discussed a national VAT in order to reduce deficit burdens.

State sales tax rates vary widely, and some states have an additional income tax as well. This state income tax is in addition to the federal income tax. In some cases, it may make it cost-prohibitive to live in certain states.

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Discussion Comments

By Fuzzster34 — On Mar 29, 2014

@epikal I totally agree.

I own a hardware store and I make sure that I only use my sales tax certificate to purchase things I will resale in my store tax-exempt.

I have had many customers that have tried to use their certificate to purchase building materials to repair their own stores tax-exempt, which is not correct.

By epikal — On Mar 28, 2014

As a former sales tax auditor, I would recommend that you contact your state agency to make sure you know the rules and regulations regarding using your sales tax certificate.

Many new business owners think this certificate can be used to purchase anything for their business tax exempt, which ends up costing them money when their business selected for an audit by the state.

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