There are two different levels of tax exemptions: state sales tax and federal income tax. As you know, or could easily make an educated guess if you didn’t know, state taxes fund the state government while federal taxes fund the federal government. In the United States, all taxpayers must go through the IRS to process their federal taxes, but each state is filed through their own taxing authority.
While many people may become tax exempt on a federal level, it’s rather difficult for people to become exempt on a state level. This is because state taxes keep the state government running, and the number of people in one state is much less than the number of people in the entire U.S. Therefore, if half of the state became tax exempt, that wouldn’t leave much funding for the state government.
Ready to learn about the different levels, if you may qualify to become tax exempt, and what that means when you’re purchasing something at a business such as American Tees? Let’s dive into it!
Federal Income Tax Exempt
You can be exempt from paying federal income tax with a Form 501C3, but that does not automatically make you state sales tax exempt, only income tax exempt. Nonprofits do not have to pay federal income tax on profits. You can visit https://www.irs.gov/charities-non-profits/applying-for-tax-exempt-status to learn more about applying to become federal income tax exempt. The form on the left is the form people typically present to us in store, but this form is for federal income tax exemption, therefore we are unable to accept it in our store.
State Sales Tax Exempt
Every business is a sales tax collector for their state, unless their state doesn’t collect sales tax. There are only a handful of states that do not collect sales tax therefore this information would not apply to them. You can visit https://taxfoundation.org/data/all/state/2023-sales-tax-rates-midyear/ to find out more information on the current sales tax rates by state.
When a state collects sales tax that means businesses are required by law to withhold sales tax unless proper documents are furnished. The proper documents needed would be a resale certificate or a state sales tax exempt card. So, who is typically state sales tax exempt? Places like churches, fire departments, governments, and some non-profit organizations are often sales tax exempt but they are still required to provide proof of documentation at the time of a purchase.
Why do you have to provide proof of sales tax exemption each time you make a purchase if you fall under one of the above mentioned categories? Simply put, people tend to get state and federal tax exemptions confused so if a business took everyone’s word about being sales tax exempt and didn’t require proof it may come back to bite the business.
If the business ended up getting audited and it was found that they were not charging sales tax, then they would have to pay the sales tax as well as the penalties for the length of time it was not being collected. The cost of the uncollected sales tax and penalties combined could potentially be detrimental to a business.
One exception to this is if someone owns a boutique or store, for example, and they purchase t-shirts from American Tees to resell in their store then they would not pay sales tax at the time of their purchase at our store because they would collect the sales tax when they sell them to their customers. The same would apply if it were a church, school, or government agency buying t-shirts directly from us then they would give us a copy of the form they have from the state to show they’re sales tax exempt.
Online stores would work a little differently. If a school or church does an online store with us, then we would have to charge sales tax because the church or school would not be the ones paying us and each individual person purchasing from us is not exempt from sales tax.
These are the proper proof needed that we CAN accept in our store for state sales tax exemptions!
That’s All, Folks!
Whew! That was a lot of information to cover and we know anything tax related can be difficult to understand and process all at once. We hope we’ve clearly explained the difference between federal income tax exempt and state sales tax exempt, but if you have more questions about exemptions when purchasing from American Tees, please reach out to us! We’re always here to help!
If you’d like more information or to apply to become tax exempt, we’ve linked the websites for that below. The site linked for state tax exemption is for Oklahoma since that’s the state we’re located in, so if you’re in another state you can find your state tax exempt form by conducting a Google search.
Federal Income Tax Exemption Applications:
https://www.irs.gov/charities-non-profits/applying-for-tax-exempt-status
OKLAHOMA State Sales Tax Exemption Application:
