The sale of a taxable item is not subject to sales or use tax if either the purchaser is exempt from sales tax or the purchaser uses the item in a manner that is exempt from tax. If you sell a taxable item to a customer, you must collect sales tax unless you accept a properly completed exemption certificate. The exemption certificate is proof that the taxable item was purchased by an exempt organization or for exempt use. The certificate must be taken on a timely basis, and it must include certain specific information. See Rule 3.287. The exemption certificate can be downloaded from the Tax Forms Online page.
2. Does an exemption certificate have to have a number to be valid?
No. For state tax purposes, there are no "tax exempt" numbers.
3. Who qualifies as a purchaser exempt from sales tax?
An organization may buy items tax free if the items are purchased to further the organization's exempt purpose. For more information, see Rule 3.322 "Exempt Organizations."
Here is a list of the types of organizations that may qualify for an exemption from sales tax:
Religious organizations are organized groups of people regularly associating for the sole purpose of holding, conducting and sponsoring religious worship according to the rites of their sects. Organizations that simply support and encourage religion as an incidental purpose or that further religious work or that teach their membership religious understanding do not necessarily qualify for exempt status.
Charitable organizations devote substantially all of their activities to the alleviation of poverty, disease, pain, and suffering by providing needy persons with food, drugs, treatment, shelter, clothing or counseling.
Educational organizations are devoted solely to systematic instruction with a regularly scheduled curriculum, faculty and enrolled student body at a place where the educational activities regularly occur. Organizations with activities consisting solely of public groups, forums, panels, lectures or other similar programs may qualify for this exemption if the presentations provide instruction in the commonly accepted arts, sciences, and vocations.
Youth athletic organizations are nonprofit corporations or associations engaged exclusively in providing athletic competition among persons less than 19 years of age.
Organizations that qualify for exemption from federal income tax under Internal Revenue Code section 501(c)(3), (c)(4), (c)(8), (c)(10) or (c)(19).
Volunteer fire departments are organized for the purpose of answering fire alarms and, in some instances, providing emergency medical services. The members of these organizations receive no compensation or only nominal compensation for their services.
Chambers of commerce and tourist promotional agencies represent at least one Texas city or county, are not organized for profit and do not pass any net earnings to private shareholders or other individuals.
Political subdivisions - agencies and departments of the United States government, the State of Texas and any county, city, school district or other political subdivision of the State of Texas.
4. Is there any way I can verify whether an organization is an exempt organization?
Generally, it means that there are certain uses of a product that are exempt from sales and use tax. For example, the sale of a tractor is taxable, but the sale is exempt if the tractor will be used in commercial farming. It is the certain use of that tractor that makes the sale exempt.
We cannot cover all scenarios of exempt uses, but here are some that you should know.
Farmers and ranchers are not generally exempt from sales and use tax. Some materials and equipment are exempt if used for farm or ranch purposes. Some examples include animals, seeds, feed for farm and ranch animals, machinery and equipment if used for farming or ranch work. See Rule 3.296 "Agriculture, Animal Life, Feed, Seed, Plants and Fertilizer."
Manufacturers may claim a Texas sales tax exemption for tangible personal property directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary or essential to the manufacturing, processing, or fabrication operation and directly makes or causes a chemical or physical change to the product being manufactured, processed, or fabricated for ultimate sale.
Please refer to Rule 3.300 "Manufacturing; Custom Manufacturing; Fabricating; Processing" for additional information.