Where you need to be registered to get an exemption certificate

Not every business is required to collect sales tax in every state. But if you do have to collect and remit sales tax in a state, you generally need to validate your exempt sales of taxable goods or services in that state.

A sale can be exempt for a variety of reasons. Sometimes the purchaser is exempt, as is often the case with government agencies. Sometimes the sale is exempt because the product will be incorporated into a taxable product, as in manufacturing. And sometimes goods are purchased by retailers to resell.

Unless goods or services are exempt under state law, like food for home consumption in West Virginia or most clothing in Pennsylvania, exempt transactions must be validated by an exemption or resale certificate. If they aren’t, the seller can be held liable for the uncollected tax, plus associated penalties and interest charges.

Businesses should obtain an exemption certificate the first time a customer makes an exempt purchase and update it if the customer’s details, like the nature of the customer’s sales or the customer’s federal tax ID number, change. In states where exemption certificates expire, they must be renewed.

Beyond that, exemption certificate rules and regulations vary by state. It’s common for a purchaser to have to provide a resale certificate to the supplier. However, a few states also require the end user to provide an exemption certificate to the purchaser, who then passes it on to the supplier (along with the purchaser’s own resale certificate stating the items are for drop shipping): California, Massachusetts, Mississippi, and Tennessee. These states need the customer certificate because the purchaser has no nexus in the supplier/customer state.

Exemption certificates are issued by the state where the exempt sale occurs. Some states also accept multijurisdictional exemption certificates from the Multistate Tax Commission (MTC) or the Streamlined Sales and Use Tax Governing Board (SSUTA, or SST). At a minimum, almost all certificates ask for the following information:

• Name of the buyer and seller
• Reason for the exemption (e.g., government, manufacturing, or resale)
• Signature and date (ideally the date of the first exempt transaction, or within a certain period of time)

State-issued exemption and resale certificates can be found on a state tax authority’s website. There are often different certificates for different situations or industries, as seen on the New York State Department of Taxation and Finance Exemption Certificates for Sales Tax page.

In instances where similar transactions routinely occur between a buyer and a seller, (e.g., a manufacturer buying parts from a supplier), a blanket or single certificate can usually be used. When there’s a blanket certificate on file, sellers don’t need to collect separate certificates for each transaction.

The states below accept exemption certificates from other states, but only if the purchaser isn’t registered in the state where the sale occurs and is using a drop shipper* that is registered in that state: 

The following states also accept certificates from other states, but only if the product wasn’t first-on-board in (aka, packaged and shipped from) that state:

• Connecticut
• Florida
• Louisiana

The following states (and district) do not accept certificates from other states, therefore transactions are always taxable:  

• Maryland
• Hawaii
• Washington, D.C.

The MTC multijurisdictional Uniform Sales and Use Tax Exemption/Resale Certificate was accepted by the states listed below as of 2019. However, since state requirements are subject to change, the MTC “cannot guarantee” that all of the states still accept this certificate. Furthermore, states may accept the uniform certificate only in certain situations or for certain transactions (e.g., for resales but not exempt sales).

Please note that some of the above states still require a reseller to be registered to collect sales tax in the state where the reseller makes the purchase. Others accept certificates containing another state’s ID number. In Florida, for example, the certificate states that a selling dealer in Florida must include a resale authorization number from the Florida Department of Revenue. In Pennsylvania, the certificate must contain the purchaser’s sales and use tax license number.

In Georgia, the purchaser’s state of registration number is accepted in lieu of a Georgia registration number if:

• The purchaser is located outside Georgia,
• The purchaser doesn’t have nexus with Georgia, and
• The tangible personal property is delivered by drop shipment to the purchaser’s customer located in Georgia

Like the MTC, the SST provides a multistate exemption certificate, the Streamlined Sales Tax Agreement Certificate of Exemption. This certificate is accepted by the 24 SST member states listed below:

A business doesn’t have to be registered with the SST in order to use the SST exemption certificate.

Each of the above states determines whether the state-issued ID number or the SST identification number should be used. Sellers should always contact the state tax authority to verify the extent to which the certificate is accepted (and, for non-SST states, to see if they accept the SST certificate; some do).

So, which states will and won’t accept an exemption certificate from you unless you’re registered in that state?  To recap:

Three states require a reseller to be registered in that state (i.e., they won’t accept a certificate from an unregistered business): Hawaii, Maryland, and Washington, D.C. Therefore, all such sales taxable.

Three states accept another state’s reseller number (another state’s certificate) provided the items didn’t originate in the nexus state: Connecticut, Florida, and Louisiana. In other words, Florida will accept another state’s reseller number if it has proof of first-on-board that the item didn’t originate in Florida.

Four states require a pass-through or they won’t accept another state’s certificate: California, Massachusetts, Mississippi, and Tennessee.

Thirty-five states accept an exemption certificate from another state provided the purchaser isn’t registered in the state where the sale occurs and is using a drop shipper* that is registered in that state: Alabama, Arizona, Arkansas, Colorado, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. Certain restrictions may apply.

No matter what certificate is used to validate an exempt transaction, it must be kept as required by state law. Unvalidated exempt sales are a common cause of negative audit findings.

Learn more about when sales tax exemptions are needed in this excellent article by Silvia Aguirre, the co-founder of Avalara CertCapture (hat tip to Silvia for helping with this post). And if you want to simplify exemption certificate management for your business, consider automating it.

*Fun fact: In drop-shipping scenarios, some states base sales tax on the price the customer pays, while others base sales tax on the price paid by the purchaser to the supplier.