A Guide to Sales Tax Exempt Forms

A Guide to Sales Tax Exempt Forms
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What Is the Sales & Use Tax?

Depending upon your state and their laws on sales tax, almost any business that sells a service or a product will usually need to charge the customer sales tax on the transaction. Consequently, every month, the business pays collected sales tax to their State’s Revenue Department, often called the Taxation and Revenue Department.

The amount of sales and use tax collected from each transaction is based off of a percentage set by the county your business operates in. For example, I have two businesses, one in Taos County and one in the Town of Taos; each of these have different tax rates I must charge the customer—7% and 7.65% respectively.

These taxes are applied to the total amount of the sales transaction and can include a product, labor or service I obtained to sell the product.

_Image Credit: Screenshot of Sale Tax Exempt Form Application: (_https://www.tax.state.nm.us/forms/year99/acd31050.pdf__)

When is Sales Tax Exempt?

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Before you can order sales tax exempt forms, in most states, you need to know what type of non-taxable transaction certificates (NTTC) you should apply for. The most popular types are:

  • Product or Professional Resale – This sales tax exempt form is generally utilized when a business buys a product from a vendor. At the time of purchase from the vendor, no sales tax is charged as the appropriate sales tax will be applied once the vendor product is sold to a customer. These forms also cover the professional services in the medical and professional world—most of these services are exempt from sales tax.
  • Service for Resale – These sales tax exempt forms are utilized if a business requires the service of another business in order to sell its product. Again, the business pays no sales tax to the service provider, but to the customer who pays for and benefits from the service. For example, say my business needs to sublet a repair for my business such as rotating tires because I don’t have a tire rotation machine. While I don’t pay sales tax to the business that rotated the tires, I do charge my customer for this sublet service.
  • Out of State Forms – Some states require businesses that purchase all of their supplies from another state to use this sales tax exempt form to avoid paying sales tax in both states. In this example, the state where the businesses sits will be the benefactor of the sales tax charged.
  • Construction & Real Estate – Construction and real estate forms, depending upon state laws, must also apply for and utilize forms that exempt them from paying sales tax depending on state laws and the type of construction or real estate business.

Your state’s taxation and revenue department provides these NTTCs once you have applied for and received a sales tax identification number for your business. Once you receive the appropriate type of non-taxable transaction certificates, you must exchange this certificates with all your vendors and suppliers and they must be kept on file at your business as well as the vendor’s place of business.

Image Credit: Uncle Sam Pointing Finger (https://commons.wikimedia.org/wiki/File:Uncle_Sam_(pointing_finger).jpg)

Reporting Exempt Sales Tax

Screenshot Sales Tax Exempt Form

Unless a business is totally exempt from paying sales tax, each business is required to pay collected sales tax and report sales that were exempt from sales tax.

Based on the volume of the business, this is most commonly done either monthly or quarterly by using a sales tax reporting form. Once a business has received a sales tax identification number, the state determines the frequency of reporting and issues sales tax reporting forms.

While businesses are not required to submit their sales tax exempt forms (they are only exchanged between businesses and vendors but must be kept on file), they are required to report the number of both collected sales tax and sales that were exempt from sales tax.

Say a bookstore business sold 10 books to customers who paid the appropriate sales tax and the total sales tax collected for a month was $100. In that same month, the book business purchased from its book supplier 5 books worth $50. On the sales tax reporting form, in most state, the amount of exempt sales tax is determined using the following method:

  • Total Sales for the Month - $100
  • Total Exempt Transactions - $50 (this is what the business paid to the vendor)
  • Total sales minus total exempt transactions - $100 - $50 = $50
  • The business owner would pay the appropriate sales tax percentage on $50 for the reporting month.

Using sales tax exempt forms and the laws for reporting and paying sales tax is different in every state. For example, in New Mexico, the sales tax reporting form is also used to report and pay the amount of state tax withheld from each employee’s pay and must also be submitted along with the appropriate sales tax due. To determine the laws for your state when you have a new business or buy an existing business, contact your state’s taxation and revenue department. Most taxation and revenue departments have online services that will enable you to apply for a sales tax identification number, obtain non-taxable transaction certificates, and forms to report and pay your sales tax.

Image Credit: Screenshot Sales Tax Exempt Form: (https://www.mansfieldelectric.com/consumerforms/form_st5a.htm)