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What is a tax exemption certificate (and does it expire)?

Tax exemption certificates play a crucial role in your tax compliance as an online business.

Imagine: A new customer approaches you and claims that they don’t have to pay you US sales tax. Are they lying to you? Trying to scam you out of paying taxes you’ll have to cover?

New retailers aren’t always aware of tax exemption certificates, but as your business grows, it’s something you’re likely to encounter. Depending on the type of business you run, you may even want to file for one yourself so that you can purchase goods intended for resale without paying taxes.

Not sure what your tax exemption certificate obligations are? Read on for our advice:

What is a tax exempt certificate?

A tax exempt certificate is an official document that declares a business’ purchases are not subject to the usual taxation system, be that sales tax, VAT, or GST.

Different types of tax exemption certificates

Because nothing associated with the US sales tax system is easy, there are actually several different types of tax exemption certificates your business may qualify for or receive from your customers.

For example, certain types of entities – such as governmental bodies and some nonprofits – qualify to purchase items tax-free for their own use. These organizations qualify for “entity exemption certificates.”

Others qualify based on the way they’ll be using their purchases. Retailers that are purchasing items to resell, for example, are typically issued usage-based resale certificates. Contractors who will be working on governmental projects may qualify for usage-based exemption certificates as agents of a government entity.

Yet another type is the direct pay certificate, which is most often used by companies that purchase both tax-exempt and taxable goods at the same time. Companies using these certificates promise that they’ll handle their tax calculations and remittals on their own.

Confusing, right?

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Do tax exemption certificates expire?

Some tax exemption certificates do expire, although the expiration date depends on your state and entity type. In certain states, such as Texas, your resale certificate will not expire as long as none of the essential business information has changed.

How long are tax exempt certificates good for?

Tax exemption certificates last for one year in Alabama and Indiana. Certificates last for five years in at least 9 states: Florida, Illinois, Kansas, Kentucky, Maryland, Nevada, Pennsylvania, South Dakota, and Virginia.

If you hold a tax exemption certificate in one of these states, make sure you renew as required to avoid possible penalties. 

And if you sell to certificate-holding customers in one of these states, you’ll need to flag when their certificates expire so that you can request new ones with enough time to receive the updated information before purchases go out.

Sound like a pretty big hassle? We agree. That’s why businesses trust Quaderno. Our automated sales tax management platform takes tax compliance out of your hands, so you can get back to focusing on what you do best.

Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.

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