Understanding Sales Tax Exemptions in South Dakota
Sales tax exemptions play a critical role in helping businesses manage their expenses and stay compliant with state regulations. In South Dakota, businesses can reduce their tax burdens by securing a South Dakota Sales Tax Exemption Certificate, which allows them to purchase certain goods and services without paying sales tax.
South Dakota sales tax rate is currently 4.2% as of 2025, having been reduced from 4.5% in July 2023. Businesses must keep track of which purchases qualify for exemptions and ensure that certificates are issued and maintained correctly to avoid costly mistakes.
A modern solution like Commenda offers a modern, reliable solution that automates the management of exemption certificates. With automation at its core, Commenda eliminates the risk of human error, ensures compliance with state regulations, and saves you time. Its user-friendly interface makes it easy to track and verify each certificate.
This guide explains the sales tax exemption certificate for South Dakota, covering types, requirements, best practices, and how Commenda simplifies management.
What Are Exemption and Resale Certificates?
What is a South Dakota Sales Tax Exemption Certificate? It allows businesses to purchase certain items without paying sales tax. This includes goods intended for resale and specific items used in manufacturing processes.
On the other hand, a resale certificate allows businesses to purchase goods for resale without paying sales tax, provided the items are sold to customers in the normal course of business.
Here’s a simple table to clarify the roles of resale and exemption certificates:
| Aspect | Resale Certificate | Exemption Certificate |
| Purpose | Used for purchasing goods that will be resold in your business. | Used for exempting purchases related to specific business activities or use cases. |
| Eligibility | Only available to businesses engaged in reselling products. | Available for specific uses such as manufacturing, agriculture, or charitable purposes. |
| Tax Exemption | Exempts sales tax on items bought for resale only. | Exempts sales tax on purchases for business operations, like manufacturing equipment. |
| Types of Goods | Applies to goods that are resold to customers in their original form. | Applies to goods or services used in your business processes but not sold directly. |
| Documentation | Requires proof that the items will be resold, typically through inventory tracking. | Requires justification for why the goods or services qualify for exemption under the law. |
Exemption Types Recognized in South Dakota
In South Dakota, various exemption types are recognized to help specific buyers avoid paying sales tax on qualifying purchases. To qualify, entities must present a valid sales tax exemption certificate, such as the South Dakota Sales Tax Exemption Certificate or the Resale Certificate.
Here are some common types of exemptions that may apply in local jurisdictions in South Dakota:
1. Resale Exemption
This exemption allows businesses to purchase goods intended for resale without paying sales tax. To qualify, you must provide a South Dakota Sales and Use Tax Exemption Certification to your supplier. It’s your responsibility to ensure that the items are indeed for resale and not for personal or business use. Misuse can lead to penalties. A blanket certificate can be issued for recurring purchases from the same seller.
2. Nonprofit Organizations
Certain nonprofit organizations are exempt from sales tax on purchases related to their exempt purposes. To claim this exemption, you must apply to the South Dakota Department of Revenue and obtain an exemption number, which should be included on the exemption certificate. Relief agencies and private schools must renew their exemption status every five years.
3. Government Entities
Federal, state, and local government agencies are exempt from sales tax on purchases made for governmental purposes. These entities must provide an exemption certificate to the vendor, or the vendor must maintain documentation showing the purchase was paid with government funds. Some government entities are issued exemption numbers that include the letters “RG,” which should be included on the exemption certificate.
4. Manufacturing Exemption
Manufacturers can purchase certain equipment and materials used directly in the manufacturing process without paying sales tax. To qualify, you must provide a completed Form 01-EX, South Dakota Sales Tax Exemption Certificate to your supplier. The exemption applies to items that become an integral part of the finished product or are used in the manufacturing process.
5. Agricultural Exemption
Agricultural producers can purchase certain items used in farming and ranching without paying sales tax. To claim this exemption, you must provide a completed Form 01-EX, South Dakota Sales Tax Exemption Certificate to your supplier. The exemption applies to items such as feed, seed, and certain farm equipment.
State-Specific Requirements for Exemption Certificates
To qualify for sales tax exemptions, businesses and organizations must meet certain conditions and follow clear processes. The South Dakota Sales Tax Exemption Certificate is a key document; however, understanding how do I get a South Dakota Sales Tax Exemption Certificate can be tricky.
Below are the exact state-specific rules for exemption certificates:
1. Required Information on the Certificate
To ensure validity, the exemption certificate must include:
- Purchaser’s Name and Address: Clearly identify the buyer.
- Reason for Exemption: Specify the exemption type (e.g., resale, nonprofit, government).
- Description of the Property or Service: Detail the items or services being purchased.
- Signature of the Purchaser: The certificate must be signed by an authorized representative.
- Date of the Transaction: Indicate the date of purchase.
- Purchaser’s Sales Tax License Number: If applicable, include the buyer’s sales tax license number.
2. State-Issued Forms and Acceptable Formats
South Dakota provides a standardized exemption certificate form, Form 01-EX, which can be used for various exemption types. While this form is widely accepted, the state also recognizes other formats, such as:
- Streamlined Sales Tax Agreement (SSTA) Certificates: For businesses participating in the SSTA, these certificates are accepted.
- Federal Employer Identification Number (FEIN): For out-of-state purchasers without a South Dakota sales tax license, using the FEIN is acceptable.
3. Validity and Renewal of Certificates
In South Dakota, exemption certificates do not have a fixed expiration date. However, it’s advisable to update them periodically to ensure accuracy and compliance.
- Validity Period: Do sales tax exemption certificates expire in South Dakota? Yes, sales tax exemption certificates in South Dakota can expire, depending on the exemption type.
- Renewal Recommendations: While not mandatory, it’s recommended to review and update exemption certificates every three to four years to maintain current and accurate records.
- Record Retention: Sellers are required to keep exemption certificates on file for at least three years.
4. Submission Methods: Electronic vs. Paper
South Dakota permits both electronic and paper submissions of exemption certificates:
- Electronic Submission: Certificates can be submitted electronically, provided both parties agree and the system used ensures the authenticity and integrity of the document.
- Paper Submission: Traditional paper certificates are still widely used and accepted.
Common Pitfalls and Compliance Risks
When dealing with exemption certificates, businesses must be mindful of common pitfalls that can lead to compliance risks. Failing to follow the proper guidelines for the South Dakota Sales Tax Exemption Certificate can result in penalties, audits, or the disallowance of exemption claims.
Below are common pitfalls businesses face and how to avoid them.
| Pitfall | Solution |
| Failing to update exemption certificates on time | Review and update certificates every 3-4 years to ensure accuracy. |
| Using incorrect forms for specific exemptions | Always use the correct South Dakota exemption forms for each type. |
| Providing incomplete buyer information | Ensure all fields, like buyer’s name, exemption reason, and signature, are filled. |
| Not retaining certificates for the required period | Keep certificates on file for at least three years for audit purposes. |
| Misusing certificates for non-eligible items | Only use exemption certificates for eligible items, like resale goods. |
| Incorrectly claiming exemptions for services | Verify that only qualifying services are included in exemption claims. |
Best Practices for Managing Exemption Certificates
If you’ve been managing exemption certificates for your business for years, but an audit reveals improper storage or missing information, you could face penalties and additional paperwork. This situation can be avoided with proper management and careful attention to detail, ensuring compliance and reducing the risk of complications.
By following the best practices below, you can manage your South Dakota Sales Tax Exemption Certificate efficiently.
- Centralized Tracking System: Set up a digital system to monitor all South Dakota exemption certificates, including expiration dates and renewal periods.
- Assign Responsibility: Appoint a specific person or team to manage exemption certificates. This ensures that all deadlines are met, reducing the chances of missing renewals or submitting incorrect forms.
- Review and Track Renewals: Schedule an annual review of your certificates. Track expiration dates and set automated reminders for renewals. This helps you stay ahead of any required updates and prevents compliance issues.
- Store Certificates and Supporting Documentation: Keep both digital and physical copies of exemption certificates and all supporting documentation, such as proof of nonprofit status or manufacturing use.
- Ensure Proper Submission: Confirm the submission requirements for each exemption type. Some certificates in South Dakota can be submitted electronically, while others, like Form 01-EX, may require paper submission.
- Educate Your Team: Train your staff on the specific requirements for managing exemption certificates in South Dakota. Clear understanding and proper handling of certificates can prevent mistakes and ensure compliance.
- Conduct Regular Audits: Perform internal audits to ensure exemption certificates are being used properly and in compliance with South Dakota’s sales tax regulations. Regular checks will help identify potential issues early.
How Commenda Simplifies Exemption Certificate Management
Managing exemption certificates manually can be time-consuming, error-prone, and risky, especially in South Dakota’s local jurisdictions that impose sales taxes. Commenda, a Global Sales Tax Platform, simplifies the state of South Dakota Sales Tax Exemption Certificate management with powerful features that bring efficiency to your workflow.
Here’s what Commenda can offer:
- Automated Collection: Automatically gather exemption certificates from customers, eliminating the need for manual follow-ups.
- Bulk Validation: Validate multiple certificates at once, saving you from the tedious task of individually reviewing each one.
- Real-Time Alerts: Receive automatic notifications when certificates are about to expire, so you can stay ahead of renewals and avoid penalties.
- Cloud Storage: Store certificates securely in the cloud for easy access, organization, and quick retrieval during audits.
Getting Started with Commenda in South Dakota
Managing South Dakota Sales Tax Exemption Certificates with Commenda is quick and straightforward. Here’s how to get started:
- Create an Account and connect your sales or ERP system to Commenda for easy integration with your current workflows.
- Upload Existing Certificates or let Commenda automatically request certificates from your customers using South Dakota-specific forms.
- Enable South Dakota Rules, which Commenda applies automatically based on buyer details and transaction specifics.
- Use the Dashboard to track certificate status, receive real-time alerts for upcoming renewals, and monitor any compliance gaps.
With these simple steps, you’ll be ready to streamline your exemption certificate management and stay compliant with South Dakota tax regulations.
Schedule a free demo to speak with an expert and learn how to manage sales tax exemptions while customizing workflows for your business!
FAQs: Exemption Certificates in South Dakota
Q. What are the specific documentation requirements for exemption certificates in South Dakota?
Exemption certificates must include the purchaser’s name, address, reason for exemption, description of the property or service, signature, and date. For certain entities, like relief agencies, a permit number containing the letters “RA” is also required.
Q. How do I know if a buyer qualifies for an exemption under South Dakota tax law?
Buyers may qualify for exemptions if they are government entities, nonprofit organizations, or relief agencies recognized under 501(c)(3) of the Internal Revenue Code. They must provide a valid exemption certificate at the time of purchase.
Q. Does South Dakota require periodic renewal or revalidation of exemption certificates?
Exemption certificates in South Dakota do not have a fixed expiration date. However, it’s advisable to review and update them periodically to ensure they remain valid and in compliance with current laws.
Q. Can I accept out-of-state resale or exemption certificates in South Dakota?
South Dakota generally accepts out-of-state resale or exemption certificates if the buyer is from a state that provides a similar exemption for South Dakota entities or does not impose a sales tax. Documentation should be provided to verify the exemption status.
Q. What happens if I can’t obtain a certificate before a sale?
If a valid exemption certificate is not obtained before the sale, the seller is required to collect and remit sales tax on the transaction. Failure to do so may result in penalties.
Q. How does South Dakota handle drop shipment transactions involving resale certificates?
In drop shipment transactions, the seller must obtain a valid resale certificate from the purchaser. The seller is responsible for collecting and remitting sales tax unless the purchaser provides the necessary documentation to claim an exemption.
Q. What are the penalties for exemption certificate errors in South Dakota?
Providing an exemption certificate with the intent to evade payment of tax is considered a Class I misdemeanor in South Dakota. Penalties may include a fine up to 50% of the tax due, in addition to the tax owed.
Q. Can I automate certificate collection and validation to meet South Dakota audit standards?
Yes, businesses can implement automated systems to collect and validate exemption certificates. These systems can help ensure compliance with South Dakota’s sales tax laws and streamline the audit process.
Q. What is exempt from sales tax in South Dakota?
In South Dakota, common exemptions include:
- Resale Purchases: Items purchased for resale in the ordinary course of business.
- Government Entities: Purchases made by federal, state, or local government agencies.
- Nonprofit Organizations: Certain nonprofit organizations recognized under 501(c)(3) of the Internal Revenue Code.
- Relief Agencies: Organizations devoted exclusively to the relief of the poor, distressed, or underprivileged.
- Agricultural Products: Certain farm machinery and attachment units used exclusively for agricultural purposes.
