Do you qualify for a tax exemption?

There are a lot of things when you start a business that you seem to just overhear. For me, tax exemption was one of those things. I remember I would walk into stores to collect materials for a job and they would ask if I had my NTTC with me. They would say it so bluntly as though everyone knows what that means. Meanwhile I would feel like they were speaking a totally different language. Eventually when things like that would happen I would quickly try to write down what I thought they said and then run home and google it. Let me tell you, NTTC is easily misheard and google does not know what NTPC or MTCC has to do with buying paint. Even when I figured out what they were saying, tax exemption was a confusing topic. 


What is Tax Exemption?

Defining tax exemption gets a bit tangled because the phrase “tax exempt” is used for two different things. There is “tax exempt” as a status and tax exemption for individual transactions. For clarity sake we’ll reserve the phrase “tax exempt” for the status and otherwise we’ll call it non-taxable transactions. 

1. Tax Exempt 

To put it simply, being tax exempt means that you do not have to pay some of your tax to the government. Depending on where you live, the qualifications for eligibility may be differ. 

Federally, charities and nonprofits can apply to be tax exempt from income tax. 

Nonprofit revenue (or contributions) aren’t considered income. As a result, they don’t have to pay income tax. They may still be required to pay other taxes (like employment or property taxes). Whether something is considered a nonprofit is determined by the state. Some states include fraternities or political campaign offices. 

States may also have special tax exemptions. For example, New York offers property tax exemption for agricultural structures and temporary greenhouses. 

As creative service professionals, you might be thinking that you aren’t going to qualify for any of these, but it can’t hurt to check right?


2. Non-Taxable Transactions

It is much more likely that you will be eligible for non-taxable transactions. In this case, you would be free from paying taxes to retailers (or wholesalers) in certain circumstances. 

There is no federal policy in place for determining non-taxable transactions, these are determined by state policy (at this point you might be sensing a theme with taxes). However, most states make transactions that include:

  • Resale items
  • Materials for construction
  • Some states include textbooks or even essential vehicles like tractors.
  • Some states, like Oregon, do not have sales tax to worry about. 

Business to business sale is tax exempt for resale purchases. The tax on that product is charged at the time of final sale. In other words, if you are buying materials that you will use in your work that will then be sold again then you may be able to get the tax removed from the initial sale. With this, you will still pay the taxes for it eventually. When the job is finished, you as the business will have to pay sales tax (or gross receipts tax). However, If you are charged tax for materials in addition to paying the sales tax in the end, then that product is double taxed.

Source: NYC.gov


Making a Non-taxable Transaction

Again, this is going to be determined by your individual state policy. However, most states are going to require some sort of documentation for each transaction. Every state seems to have their own name for it. In New Mexico they call it a Non-Taxable Transaction Certificate (NTTC) whereas Colorado calls it a Tax Exemption Certificate. Some states also require a resale license in addition to the certificates. They generally act the same way though. 


Most likely, you will obtain the certificate from your state government. 


I will tell you, sometimes it can be a headache to get them. In the state of New Mexico, you must first apply for the certificates and then you have to remain in good standing in order to print NTTC’s. If you are having trouble, start by checking on the status of your application. If that’s in order then you have the joy of sifting through your business history to figure out why you aren’t considered “in good standing”. 


That being said, in most states once you set up your business account online, you can easily print certificates, pay taxes, and check your status. 


The business you are buying materials from may ask for your NTTC like my paint vendor did but they also may not. Unfortunately, this is another case where you as the business owner will have to go into a transaction knowing whether it is non-taxable or not.


Unlike tax exemption, non-taxable transactions are on a case-by-case basis and you as the business will still have to pay the taxes to the government. 


The Takeaway

As a creative freelancer or creative business owner, I bet you didn’t get into it so that you could sift through tax code. Unfortunately, in order to keep your business afloat, you will need to. 

3 Things to Remember

  1. If you don’t qualify for tax exemption, you most likely qualify for nontaxable transactions.
  2. Setting up your business account online will make paying taxes, printing certificates, and checking your status easier.
  3. Take it one detail at a time and don’t be afraid to ask questions.

Try not to get overwhelmed with the layers and details of taxes. I know, easier said than done. If, like me, you hear something that you don’t understand then don’t be afraid to ask (whether you feel more comfortable talking to friends or just talking to google).

Sources

  1. Frequently Asked Questions - tax.newmexico.gov
  2. Before Applying for Tax-Exempt Status - irs.gov
  3. Common property tax exemptions for businesses - tax.ny.gov
  4. Sales Tax Exemption Certificate - nyc.gov
  5. Sales Tax Exemptions - tax.colorado.gov
  6. What Qualifies You for Sales Tax Exemptions? - smallbusiness.chron.com