Do You Owe Sales Tax on Used Equipment?

Sales tax is a transactional tax governed at the state and local levels, applied to the retail sale of tangible personal property—any physical item that can be touched and moved. The seller calculates the tax based on the sales price, collects it from the buyer, and remits it to the proper tax authorities.

The General Rule of Taxability on Used Equipment

When purchasing used equipment, the transaction is subject to sales tax. Tax laws do not distinguish between new and used goods; if an item is tangible personal property, its sale is taxable regardless of condition or age. The tax is calculated on the actual sales price agreed upon by the buyer and seller.

The seller is expected to collect the sales tax. If the seller fails to collect it, the responsibility shifts to the buyer, who must self-assess and remit a “use tax” directly to the state. Use tax shares the same rate as sales tax and ensures the state receives revenue on taxable purchases, including those from out-of-state sellers or in-state transactions where tax was not collected.

Common Sales Tax Exemptions for Used Equipment

While the general rule subjects used equipment sales to tax, several specific exemptions can change this outcome. These exemptions are narrowly defined and require the transaction to meet strict criteria based on the seller, the buyer’s intended use of the equipment, or the context of the sale.

Casual or Occasional Sale

An exemption may be available for a casual or occasional sale, though rules vary by state. This applies when the seller is not regularly engaged in the business of selling that type of equipment. For example, a law firm selling its old server rack may qualify because its primary business is legal services, not equipment sales.

States often limit the number of sales or total dollar amount that qualifies as “casual” within a year. If a business regularly disposes of used assets, it may be considered a routine seller, and the exemption would not apply.

Resale Exemption

If a business purchases used equipment with the intention of reselling it, the purchase is not taxed. For instance, a used machinery dealer who buys a second-hand forklift to add to its sales inventory would not pay sales tax on that purchase. This exemption must be properly documented at the time of sale.

If the buyer later uses the equipment for its own business, it becomes liable for use tax on the item’s original purchase price.

Manufacturing Exemption

Many states provide a sales tax exemption for machinery and equipment used in manufacturing to encourage industrial investment. To qualify, the used equipment must be used “directly and predominantly” in the manufacturing or processing of tangible personal property for sale.

“Directly” means the equipment acts upon raw materials or is part of the continuous production line. “Predominantly” means the equipment is used for a qualifying activity more than 50 percent of the time. Equipment used for administrative, storage, or distribution functions does not qualify.

Agricultural Exemption

An agricultural exemption exists for farm machinery and equipment used directly in the commercial production of agricultural products for sale. Qualifying items often include tractors, balers, and irrigation systems used in farming, ranching, or dairy operations.

The equipment must be integral to the commercial operation, not for hobbies or personal landscaping. The tax-free status of the sale must be documented at the time of purchase.

Sale of a Business (Bulk Sale)

In some states, equipment sold as part of the transfer of an entire business may be exempt from sales tax. For this “bulk sale” exemption to apply, the sale must include all or substantially all of the business assets, and the purchaser must continue operating the same type of business.

These rules also address “successor liability,” where a buyer can be held responsible for the seller’s unpaid taxes. The buyer may be required to notify the state tax agency of the sale to identify any outstanding tax debts from the seller.

Documentation for Tax-Exempt Sales

Claiming a sales tax exemption requires specific and timely documentation. Failure to properly document an exempt sale can result in the seller being held liable for the uncollected tax, plus interest and penalties, during a future audit.

The Bill of Sale

Every sale of used equipment should be documented with a detailed bill of sale, which serves as the primary record of the transaction. Both the buyer and seller should sign the document and retain a copy. A comprehensive bill of sale should include:

• The full names and addresses of the buyer and seller
• The date of the sale
• A precise description of the equipment (make, model, serial number)
• The exact purchase price
• A reference to the specific exemption being claimed if the sale is tax-exempt

The Role of Exemption Certificates

An exemption certificate is the formal document that substantiates a tax-free sale. It is the buyer’s written statement to the seller certifying they are entitled to an exemption. Different certificates exist for various exemptions, such as resale, manufacturing, or agriculture. These state-issued forms are the seller’s proof for why they did not collect sales tax on a transaction.

Buyer and Seller Responsibilities

The buyer is responsible for completing the correct exemption certificate with their business name, address, sales tax permit number, and the specific reason for the exemption. The buyer must provide this fully completed certificate to the seller at or before the time of the sale. A seller should not release equipment without collecting either the sales tax or a valid certificate.

The seller must then verify the certificate is complete and seems reasonable for the buyer’s business. For example, a construction company providing a resale certificate for a bulldozer is reasonable, but an accounting firm doing so would warrant questioning. The seller must retain the certificate for a period specified by state law, typically three to four years, as proof to show auditors.

Special Rules for Trade-Ins and Vehicles

Some transactions have unique sales tax rules. The treatment of trade-ins can affect the taxable amount of a sale, while licensed vehicles often follow a different tax collection process.

Effect of Trade-Ins

State laws vary on how trade-ins affect sales tax. In many states, a trade-in’s value can reduce the taxable sales price if it is part of a single transaction with a registered dealer. For example, if a business buys a used excavator for $50,000 and gets a $10,000 credit for a trade-in, the tax in these states would be on the net price of $40,000.

However, some states require tax on the full selling price before applying the trade-in credit.

Sales of Used Vehicles

The sale of used vehicles like cars, trucks, and trailers is an exception to standard collection rules. In a private-party sale, the seller does not collect sales tax. Instead, the buyer pays the tax directly to the state’s motor vehicle agency when titling and registering the vehicle.

This differs from sales at a dealership, where the dealer handles tax collection. To prevent tax avoidance, some states calculate the tax on the greater of the purchase price or the vehicle’s fair market value.