I have run into many folks who claim to be tax exempt.  There are two different kinds of exemption – income and sales.  The federal government does not bestow sales tax exemptions.  A business may show you their letter from the IRS stating very officially “TAX EXEMPT ORGANIZATION.”  This is issued for a variety of reasons from churches, to soup kitchens, to national charities, etc.  This letter coming from the IRS applies only to the federal income tax for the group.

For a group to be exempt from sales tax in the State of Kansas (and in other states I have worked), you must apply with the state.  A business may qualify for this status because they are a charity, or they may be a reseller of goods, they may be in a special development and the state has opted to exempt them.

Kansas has different forms issued for each of these scenarios.  You have an obligation to require the organization or business supply the proper form for their tax exempt situation.  An example is the Kansas form ST-28D for manufacturers and processors.  The purchaser also has an obligation to notify you if some sales are exempt and some are not.  In the manufacturer scenario, tools are not tax exempt however the metal they fabricate into something is exempt.

Keep this form on file.  This signed exemption form signifies the group is taking the responsibility of the sales tax exemption.  It is them literally saying, “I am buying this bread and cheese to make sandwiches.  I am going to sell them and charge my customers sales tax.”  If you must go through a sales tax audit, you have this form that shifts the responsibility of the sales tax from you to them.

On the other hand, if you complete a sale to a group and all they give you is an IRS letter…you are taking a risk that they haven’t been approved by the state in which you operate.  Even when they claim everybody in town accepts their IRS letter.  Your business could be on the hook for the sales tax of the transaction if they have not been approved.  If you have questions, talk to your CPA or even call the Department of Revenue.  They are really helpful…and not as scary as you think.