Understanding Tax Exemptions and Taxables

What is taxable? - Generally, states levy tax on all tangible personal property unless it is exempted by law, and tax specifically enumerated services. States such as South Dakota, New Mexico and Hawaii have a very broad levy of tax on services. While most states have similar definitions of tangible personal property (property that can be seen, weighed, felt, measured), there is no uniformity around what is subject to sales tax in a state. There are also not uniform definitions in the state. It is common for states to exempt the sale of food but tax prepared food. However, it is possible for something to be considered "food" in one state but not "food" in another state due to the applicable definition. Because each state has unique "product-based" exemptions, it is common for sellers to use tax software to "map" the products they sell into categories. The software assists in determining whether the particular product is taxable or exempt depending on the jurisdiction where the product is to be shipped. There are also many "use-based" exemptions. For example, manufacturers in many jurisdictions are allowed to purchase equipment used in the manufacturing process exempt from sales tax because those states want to encourage manufacturing in their state. Used-based exemptions generally require the seller to maintain exemption certificates from their purchaser. KPMG © 2021 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 11

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