As a small business owner, saving money is great, especially when it comes to your tax bill. Fortunately, many states in the US offer exemptions and other tax breaks to help you take the sting out of tax time.
What you’ll learn
What you’ll learn
Key takeaways
- Nonprofits are exempt from most state taxes
- There are three types of state taxes: sales, property, and income
- Qualifying for a state tax exemption may require a lengthy application process
- Tax laws vary by state, with places like Oregon having no sales tax while New York has no personal property tax
In this article, we’ll explore common tax exemptions like property, sales, and income exemptions, as well as provide you with a road map for eligibility and application to state tax exemptions. Throughout this guide, we’ve included pro tips from Peggy James, a certified public accountant and small business expert who frequently fact-checks and contributes to our content.
What are state tax exemptions and how do they work?
Each state in the US offers tax exemptions and incentives for different types of businesses.Usually, these exemptions cover sales tax, property tax, or income tax.
These exemptions and other tax breaks are designed to attract certain businesses to the state, support nonprofits, and promote businesses that deal in critical goods and services. Next, let’s explore each type of exemption in more detail.
What are the benefits of state tax exemptions for employers?
“There are very few (if any) state tax exemptions related specifically to employer taxes. However, certain businesses (for example, nonprofits) can be exempt from state-level taxes, including income, sales, and property taxes.”
— Peggy James, CPA and OnPay contributor
Sales tax exemptions: Who qualifies and what’s covered
Having a sales tax exemption means a business does not have to charge or pay sales tax on the goods and services it buys or sells.
- One of the most well-known forms of this is what’s called a product-based sales tax exemption. Common goods that fall under this include: food items, medicine, and agricultural products.
- Purchaser-based is another type of sales tax exemption. This exemption allows certain businesses to buy goods and services without tax. For instance, nonprofits, government entities, and resellers.
- A third sales tax exemption is use-based. Some states offer this exemption to businesses engaged in specific industries. For instance, a manufacturer may be able to buy raw materials tax-free, collecting and paying sales tax only on the final product.
States may also offer temporary sales tax exemptions for
- Garage sales
- Fundraisers
- Sales tax holidays (i.e., Tax-free weekend in Texas for back-to-school shopping).
Some states offer two different mechanisms for taking advantage of a sales or use tax exemption, explains Peggy.
“One way is to obtain a permit that your business presents to the vendor at the time of purchase, so sales tax is not charged upfront. The other method is to submit a refund claim for sales taxes you’ve already paid. In North Carolina, for example, nonprofits can submit a claim twice a year that documents the sales taxes paid and requests a refund.”
— Peggy James, CPA and OnPay contributor
Income tax exemptions for businesses and organizations
Income tax exemptions allow businesses to be exempt from state income or corporate income tax. Charitable organizations and government agencies are almost always exempt from state income tax (SIT), but beyond that, exemptions can vary widely.
Some states may target manufacturers with income tax breaks or credits, while others may extend exemptions to farmers or insurance companies. States can also exempt businesses based on size. For instance, some states offer reduced tax rates or flat minimum fees for businesses with lower gross receipts.
Did you know?
Nine states don’t have SIT tax withholding or any income tax at all; however, several have separate taxes just for businesses, such as franchise taxes.
Certain individuals and types of income may also be exempt from state income tax, which can complicate payroll taxes. For example, military personnel in many states are not subject to income tax, and their paychecks need to show federal tax blocked status if they are exempt from federal taxes.
Income derived from municipal bonds, insurance payouts, and lawsuit settlements is not taxable either.
One thing that’s important to understand is that these exemptions from state taxes are available for the business itself, but not necessarily for its employees.
“When it comes to income taxes, for example, a nonprofit or other business might be exempt from state income taxes at the entity level, but its employees are still subject to taxes on their wages in the majority of states,” Peggy explains.
That means if the business is an employer, it still must withhold income taxes for employees and remit those to the appropriate tax agency.
Property tax exemptions
There are two types of property you can get exemptions for: real estate and personal property (e.g., furniture or inventory).
- The first one, a real estate property exemption, is usually a local-level tax break. For instance, a church may be exempt from paying county property taxes. However, statewide programs, for certain industries or for the development of economically depressed areas, may be available.
- Personal property tax exemptions, on the other hand, are very common. For instance, in Arizona, businesses with less than $500,000 in personal property will not be charged the tax. And 11 states don’t even impose this tax at all.
Since many property tax exemptions are applied at the local level, if you manage multiple locations across county or city lines, you’ll need to keep a close eye on which locations qualify for which exemptions.
Other state-level incentives
In addition to the three major types of tax exemptions discussed above, many states offer specialized credits, deductions, and state tax breaks. Here are a few common incentives:
- Research and development (R&D) tax credits
- Capital investment incentives for distressed areas
- Tax credits for providing employee benefits
- Rebates and credits for energy-efficient buildings
- Job creation tax breaks
- Reduced tax rates for small businesses
- Relocation incentives to attract new businesses
- Tax breaks for data centers
Table of state tax exemptions: Key states to watch
While nonprofits are exempt from state taxes, other exemptions vary widely as you look at each state’s rules.
What types of businesses qualify for state tax exemptions?
“Specific types of businesses may qualify for state tax exemptions. The most common example is nonprofit organizations, which are often exempt from income taxes as well as sales and property taxes at the state and local level.”
— Peggy James, CPA
Here is a quick review of the state-level business taxes and notable exemptions in some key states.
| State | Sales tax | Income tax | Property tax | Notable exemptions |
| Arizona | Transactional privilege tax (TPC) | Flat rate corporate income tax | Personal property tax | $500,000 personal property tax exemption and military reuse income tax exemption |
| California | Sales and use tax | Franchise tax with a minimum | Personal property tax | Partial sales tax exemptions are available for qualified manufacturing and agricultural equipment |
| Florida | Sales and use tax | Corporate income tax | Personal property tax | Income tax credits for job creation and community support. |
| New York | Sales and use tax | Corporation franchise tax | No personal property tax | While not fully exempt, businesses with $100,000 or less in New York receipts qualify for a reduced minimum franchise tax fee (typically $25).
|
| North Carolina | Sales and use tax | Corporate income tax (ending by 2030) | Personal property tax | Inventory, mill machinery, and pollution abatement are exempt from personal property tax |
| Oregon | Limited excise tax (i.e., on tobacco and bicycles) | Corporate activity tax | Personal property tax | Only businesses with more than $1 million in activity are subject to corporate activity tax |
| Texas | Limited sales and use tax | Franchise tax | Personal property tax | Veteran-owned businesses, those with less than 2.47 million in revenue, are exempt from franchise tax |
With those basic rules in mind, you may be wondering if your specific industry impacts your eligibility. We posed this question to Peggy for her high-level take.
Do state tax exemptions vary by industry?
Yes, businesses in different industries may qualify for state tax exemptions. In some states, businesses in specific industries, such as agriculture, may qualify for exemptions from state and local taxes.
How can employers apply for state tax exemptions?
While each state has its own application process, qualifying for an exemption generally follows four main steps:
- Initial application or certification
- Providing supporting documentation
- Validating exemptions
- Maintaining compliance
For some exemptions, like income-based ones, the process may be quick or can even be automatic. But other exemptions may require a detailed process and extensive supporting documentation. For instance, you’ll need to get a Certificate of Authority before you can even fill out the New York state tax-exempt form for purchaser-based sales tax exemption. However, the state of Texas tax-exempt form is a one-page application.
Before starting the application process, you’ll want to visit your state’s website for guidance on filling out the necessary forms and gathering necessary documentation. They may also provide an estimate of what kind of timeline you can expect. Some states even let you track your application process online.
For perspective, Peggy offers what the steps tend to be applicable to qualify.
What requirements must be met to receive state tax exemptions?
“The requirements vary by state, but they generally include submitting an application or registration to the state tax agency, along with supporting documentation. The state will then review the application and approve it (or follow up if more information is needed) before the business can claim the exemption from state tax.”
— Peggy James, OnPay Contributor
Common mistakes employers make with tax exemptions
The guidelines for state tax exemptions range from straightforward to complex. If you are trying to manage multiple exemptions across multiple business locations, things can get even more complicated. And making even a minor mistake could land you with a hefty tax bill at the end of the year.
Simple and straightforward
“OnPay is easy to set up and use. Their customer service is prompt and helpful. Filing unemployment taxes and processing payroll would be a time-consuming task without OnPay’s easy setup.”
— Michael Kreuser, Rebel House Interior Design
Here are some tips to help you avoid common mistakes like misclassifying purchases or missing filing deadlines.
- Review your state’s website to find the exemptions you might qualify for.
- Ensure you have all documentation before filling out an exemption form.
- Read and understand all eligibility requirements. Some exemptions have clear-cut rules, while others are more complex.
- Check with the seller or the state before you buy to make sure your purchase qualifies under the exemption.
- Set calendar reminders so that you never miss a filing deadline or renewal date.
Planning for state-specific exemptions and future changes
State tax exemptions can save you money, but managing the applications and shifting rules can easily eat into your day. Instead of stressing over compliance, let us help. While you work with your accountant on sales and property tax exemptions, OnPay can manage your payroll taxes from start to finish. Our service includes innovative software that automates your payroll tracking, plus top-notch support when you need it. And because we integrate with your favorite accounting software, keeping your books accurate is simple. See how OnPay makes payroll easy.
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.