Are Municipal Governments Sales Tax Exempt?

Silvia Aguirre provided some useful information in her most recent post on Sales Tax Support about federal government exemptions. One handy tip she shared: when a General Service Administration SmartPay Card has a 0,6,7,8 or 9 as the sixth digit, the purchase is exempt. When it comes to municipalities, however, there are no easy to remember rules to use like this purchase card trick. It all depends on the state’s regulations as well as that municipalities’ rules if it has its own sales tax. In South Dakota, for example, “public or municipal corporations of the State of South Dakota” are sales tax exempt.

However, just like other buyers, municipalities are still required to provide an exemption certificate for vendors and must show that purchases were made with municipal funds with paperwork like a purchase order or check stub. However, Arkansas’s laws are completely different and do not exempt municipalities from sales tax. Like all things sales tax, every jurisdiction is different. It can be very tricky for a vendor to know when to charge sales tax and when not to for municipalities. The best thing to do: always ask for an exemption certificate before taking sales tax off of an invoice. If the municipal employee cannot produce an exemption certificate but claims that the municipality is sales tax exempt, it’s a good idea to speak with the purchasing department of the municipality. While it might seem like you’re hassling the municipality, it’s important to give the correct exemption when it’s due, rather than to be fined later with penalties for non-compliance.

If a municipality has it’s own additional sales tax, they might have special rules to exempt themselves from their own sales tax. However, states might also stipulate that municipalities have to pay the option tax they tack on to a state-wide rate too. Systems vary widely so be sure to check on applicable rules if a municipal employee says you shouldn’t charge the full rate for the jurisdiction. It’s natural to be worried about losing your contract with a city if you insist on proof of their tax exemptions. However, your diligence in getting the exemption certificates really should reassure the municipality that you’re doing everything by the book. Develop a system for collecting that paperwork so it can be done smoothly, and you’ll be less tempted to skip it.

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