Sales Tax Exemptions and Exclusions Explained

Sales tax exemptions and exclusions provide relief from sales tax for specific items, organizations, or situations. Understanding these exemptions helps you save money, ensure compliance, and make informed purchasing decisions. While sales tax rules vary by state, common exemptions include groceries, prescription medications, and items purchased for resale, among others.

Calculate your sales tax with our Sales Tax Calculator to understand how exemptions affect your total cost.

Common Sales Tax Exemptions

Most states exempt certain categories of items from sales tax, though the specific exemptions vary significantly. The most common exemptions include groceries, prescription medications, and clothing (often with price thresholds). These exemptions recognize that taxing essential items creates a regressive burden on lower-income households.

Groceries are exempt from sales tax in many states, though definitions vary. Some states exempt only unprepared food items, while others have broader definitions. Prepared foods, restaurant meals, and snacks may be taxed differently than groceries, creating complexity in determining what qualifies for exemption.

Prescription medications are typically exempt from sales tax in all states, recognizing their essential nature. However, over-the-counter medications are usually taxable, creating a distinction that can affect your total cost. Medical devices and equipment may also qualify for exemptions in some states.

Clothing exemptions vary widely, with some states exempting all clothing, others exempting clothing under a certain price threshold (like $110 or $175), and some taxing all clothing. These exemptions often apply to basic clothing items but not to accessories, jewelry, or athletic equipment.

State-Specific Exemptions

Each state has unique exemption rules that reflect local priorities and fiscal needs. For example, some states exempt agricultural equipment, manufacturing inputs, or energy-efficient products to support specific industries or policy goals.

California exempts most groceries but taxes prepared foods and restaurant meals. Texas exempts groceries, prescription medications, and medical devices. New York exempts clothing under $110 and has various other exemptions for specific items.

Some states have limited exemptions. For example, Hawaii has a general excise tax rather than a traditional sales tax, and exemptions work differently. Understanding your state's specific exemptions helps you plan purchases and save money.

Business Purchases and Resale Exemptions

Businesses can often purchase items tax-free if they're purchasing for resale or for use in manufacturing. This requires a resale certificate or exemption certificate issued by the state tax authority. The business must provide this certificate to the seller at the time of purchase.

Resale exemptions prevent double taxation—without them, businesses would pay sales tax on items they purchase and then collect sales tax when selling those items to consumers. This would create an unfair tax burden that would ultimately be passed to consumers through higher prices.

To qualify for resale exemptions, businesses must:

• Be registered with the state tax authority
• Provide a valid resale certificate to sellers
• Use purchased items for resale or manufacturing
• Maintain records of exempt purchases

Manufacturing exemptions apply to items used directly in the production process, such as raw materials, machinery, and equipment. These exemptions encourage manufacturing and economic development while preventing tax cascading through the production chain.

Nonprofit and Government Exemptions

Nonprofit organizations often qualify for sales tax exemptions when purchasing items for their exempt purposes. This requires nonprofit status and proper documentation, typically including a determination letter from the IRS and state tax exemption certificates.

Government entities—federal, state, and local—are generally exempt from sales tax when making purchases for official purposes. This includes purchases by schools, libraries, and other government agencies.

These exemptions recognize that taxing nonprofit and government purchases would ultimately burden taxpayers or reduce the effectiveness of charitable and public services. However, the specific rules vary by state and may require proper documentation.

Sales Tax Holidays

Many states have sales tax holidays—specific periods when certain items are exempt from sales tax. These holidays typically apply to back-to-school items, energy-efficient appliances, hurricane preparedness supplies, or firearms and hunting equipment, depending on the state.

Sales tax holidays provide temporary relief from sales tax and can save significant amounts on major purchases. However, they often have restrictions:

• Price limits (e.g., clothing under $100, computers under $1,500)
• Specific item categories
• Limited time periods (often a weekend or week)

Planning purchases around sales tax holidays can save hundreds of dollars on major items like computers, appliances, or clothing. However, availability varies by state, and not all states offer sales tax holidays.

Medical and Healthcare Exemptions

Medical expenses often qualify for sales tax exemptions, recognizing the essential nature of healthcare. Prescription medications are universally exempt, while medical devices and equipment may qualify for exemptions in some states.

Durable medical equipment, such as wheelchairs, crutches, or hospital beds, may be exempt from sales tax if prescribed by a healthcare provider. Over-the-counter medications are typically taxable, though some states exempt certain medical items.

Some states exempt medical services from sales tax, while others tax them. Understanding your state's rules helps you plan healthcare expenses and potentially save on medical costs.

Food and Restaurant Exemptions

Food exemptions vary significantly by state and type of food. Groceries are often exempt, but prepared foods and restaurant meals are typically taxable. This creates a distinction between buying ingredients to cook at home versus buying prepared meals.

Some states exempt all food items, while others exempt only certain categories. For example, some states exempt basic groceries but tax items like candy, soft drinks, or prepared foods. This creates complexity in determining what qualifies for exemption.

Restaurant meals are generally taxable, though some states have lower tax rates for restaurant meals compared to other purchases. Catering and food delivery services are typically taxable as well.

Understanding Exemption Documentation

To claim exemptions, proper documentation is typically required. For businesses, this means resale certificates or exemption certificates. For individuals, exemptions are usually automatic based on the item purchased, though some situations may require documentation.

When making tax-exempt purchases, keep receipts and documentation. This helps during audits and ensures you can prove that purchases were properly exempt. Businesses should maintain records of exemption certificates and exempt purchases.

Failure to provide proper documentation can result in being charged sales tax incorrectly or facing penalties for improper exemption claims. Understanding documentation requirements helps ensure compliance and proper tax treatment.

The Bottom Line

Sales tax exemptions and exclusions provide important relief from sales tax for essential items, business purchases, and specific situations. Understanding these exemptions helps you save money, ensure compliance, and make informed purchasing decisions.

Exemptions vary significantly by state, making it important to understand your state's specific rules. Common exemptions include groceries, prescription medications, and clothing, though details vary widely.

Use our Sales Tax Calculator to understand how exemptions affect your total cost, and plan purchases around sales tax holidays when available. Whether you're shopping for personal use or business purposes, understanding exemptions helps you maximize savings and ensure compliance.

Frequently Asked Questions

Are groceries exempt from sales tax? This varies by state. Many states exempt groceries but tax prepared foods and restaurant meals. Check your state's specific rules.

Do I need documentation for exemptions? For personal purchases, exemptions are usually automatic. Businesses need resale certificates or exemption certificates for tax-exempt purchases.

What are sales tax holidays? Sales tax holidays are temporary periods when certain items are exempt from sales tax. These vary by state and typically have restrictions on item types and price limits.

Are prescription medications taxed? No, prescription medications are exempt from sales tax in all states. However, over-the-counter medications are typically taxable.

Citations

• Tax Foundation. "State Sales Tax Rates and Food and Drug Exemptions." Tax Foundation Research.
• National Conference of State Legislatures. "Sales Tax Holidays." NCSL.org.
• Internal Revenue Service. "Sales Tax Deduction." IRS.gov.