What Is an Exemption on State Taxes?

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Most businesses, organizations and individuals are required to pay state tax. State taxes support important state-sponsored services and programs, and as a result, only organizations and individuals that meet specific requirements may qualify for an exemption from state tax.

State Tax Exemption

  • Exemption from state tax means that a person, business or organization does not have to pay state taxes. A tax exemption can either be a partial reduction of tax liability or a full exemption. This exemption may apply to income or payroll tax, property tax, sales tax and other related state taxes. The most common recipients of state tax exemption are religious organizations, designated nonprofit organizations and government agencies.

States

  • Since state tax exemption is implemented at the state level, it is implemented at the discretion of each state. The states of Nevada, New Hampshire, South Dakota, Washington and Wyoming do not offer state tax exemption because they do not charge state tax. The first three do, however, allow businesses, organizations and qualifying individuals to apply for sales tax exemption. Some states automatically offer tax exemption once a qualifying organization has submitted its nonprofit articles of incorporation.

Organizations

  • Nonprofit organizations are those organizations that are organized and operated exclusively for exempt purposes. This includes purposes such as charity, religion, education, scientific and other similar purposes. Depending on the state a nonprofit is located in, a state tax exemption may be granted immediately upon receipt of 501(c)(3), or Internal Revenue Service nonprofit tax status. Other states may require a nonprofit to submit notification and proof of 501(c)(3) status before granting exemption.

Individuals

  • Most individuals do not qualify for a state tax exemption. Veterans, diplomats and members of certain religious organizations may enjoy some degree of state tax relief depending on their employment status and other qualifications. Diplomats and authorized members of nonprofit organizations may qualify for state sales tax exemption. To find out whether you or the organization you work for is eligible for state tax exemption contact your local state department or Internal Revenue Service office.

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