One of the most confusing parts of sales tax for sellers is figuring out which products are actually taxable. You'd think the answer would be simple — but sales tax exemptions are a patchwork of state-by-state rules, with exceptions, sub-categories, and definitions that can make your head spin.

A jar of peanut butter might be tax-free in Ohio but taxable in Arkansas. A winter coat might be exempt in Pennsylvania but taxed in California. Software might be taxable in one state and treated as a non-taxable service in another.

This guide covers the most common product exemption categories, explains why the rules vary, and helps you figure out how to handle your specific product mix.

Why Do Exemptions Exist?

Most states exempt certain product categories for policy reasons:

Essentials: Groceries, medicine, and clothing in cold climates are often exempt because taxing necessities is considered regressive — it hits lower-income households harder.
Health policy: Prescription drugs are almost universally exempt to reduce barriers to healthcare.
Agriculture: Farming equipment and supplies are exempt in most states to support food production.
Education: Textbooks and educational materials get exemptions in many states.

There's no uniform federal sales tax law, which means each state writes its own exemption rules. What qualifies as "groceries" in one state might not in another.

Groceries and Food

Food is one of the most complex exemption categories because the definition of "food" varies dramatically.

Generally Exempt States

Most states that exempt food define it as unprepared food items intended for home consumption — basically, what you'd buy at a grocery store.

States that fully exempt groceries include: Alabama, California, Colorado, Georgia, Idaho, Illinois (mostly), Iowa, Kansas (partially), Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia, Wisconsin, Wyoming.

Taxed States

A handful of states tax groceries at the full rate or a reduced rate:

Hawaii, Idaho, Kansas, Oklahoma, South Dakota — Tax groceries at the full rate
Arkansas, Illinois, Missouri, Tennessee, Utah, Virginia — Tax groceries at a reduced rate (1–4%)

The "Prepared Food" Exception

Almost every state that exempts groceries still taxes prepared food — meaning food that's ready to eat, heated, or served with utensils. The line between grocery and prepared food matters a lot for:

Meal kit services (partially prepared?)
Hot deli items from a grocery store
Catered food
Restaurant meals

If you sell food products, your taxability often depends on whether your product requires further preparation before eating.

Candy and Soft Drinks

Many states that exempt groceries specifically tax candy and soft drinks even though they're sold at grocery stores. Under the Streamlined Sales Tax definitions:

Candy: A preparation of sugar, honey, or other natural or artificial sweeteners combined with chocolate, fruits, nuts, or other ingredients. If it contains flour, it's not candy for tax purposes (so a Twix bar is exempt in some states because it contains flour).
Soft drinks: Non-alcoholic beverages that contain natural or artificial sweeteners. Water, juice, and milk are usually exempt.

This level of detail matters if you sell food products online.

Clothing and Apparel

Always Taxable

Most states tax clothing the same as any other retail product. If you sell T-shirts, shoes, or hats in California, Florida, or Texas — those are taxable.

Exempt States

A small number of states exempt most clothing:

State	Exemption Rule
Pennsylvania	Most clothing exempt; formal wear/fur taxable
New Jersey	Most clothing exempt; fur, sportswear taxable
New York	Clothing and footwear under $110 per item exempt
Minnesota	Most clothing exempt; sporting goods, costumes taxable
Vermont	Most clothing exempt; items over $110 may be taxed

Sales Tax Holidays

Many states with taxable clothing offer annual sales tax holidays — usually in late July or early August for back-to-school shopping — during which clothing under a certain price threshold is temporarily exempt.

States that run clothing sales tax holidays include Florida, Texas, Virginia, Iowa, Missouri, Ohio, Oklahoma, and others. These are temporary windows, not permanent exemptions.

What About Accessories?

Even in states that exempt clothing, accessories are often taxable:

Jewelry: Usually taxable
Handbags and purses: Usually taxable
Belts: Sometimes exempt (functional clothing item), sometimes taxable (accessory)
Hats: Usually exempt in clothing-exempt states
Sunglasses: Usually taxable (unless prescription lenses)

Prescription Drugs and Medical Products

Prescription Drugs

This is the cleanest category. Prescription drugs are exempt from sales tax in virtually every state. This is consistent across the country with very few exceptions. If you sell prescription medications (unusual for most ecommerce sellers), they're almost certainly exempt everywhere.

Over-the-Counter Medicine

OTC medicine is more complex. Many states exempt it; others tax it at the full rate.

Exempt OTC medicine: Most states that follow Streamlined Sales Tax definitions exempt "drugs" that are sold for human use. This typically includes pain relievers, cold medicine, antacids, first aid products.

Taxable OTC products: Cosmetics, vitamins and supplements (in most states), personal care products, and items marketed for cosmetic purposes rather than health purposes.

Medical Devices and Equipment

Generally, prescribed medical devices (wheelchairs, hearing aids, insulin pumps) are exempt. Durable medical equipment (DME) has complex rules — coverage varies by product and state.

If you sell health and wellness products, working through each state's definitions is critical. A product might be "medicine" in one state and a "supplement" (taxable) in another.

Digital Products: The Wild West

Digital products are where the exemption landscape gets most chaotic. States have been scrambling to update sales tax laws to cover the digital economy, with wildly inconsistent results.

Taxable Digital Products (Most States)

States that have updated their laws to tax digital products typically include:

Digital downloads: e-books, music, movies, software
SaaS (Software as a Service): Subscription software accessed online
Streaming services: Netflix, Spotify-style subscriptions
Digital games and apps

States taxing most digital products include: Alabama, Arizona, Colorado, Connecticut, Georgia, Indiana, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, New Mexico, New York, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia, Wisconsin.

States That Exempt Digital Products

A number of states still don't tax digital goods, either because they haven't updated their laws or because they've explicitly chosen to exempt them:

California: Generally does not tax digital products (SaaS is a gray area)
Florida: Digital downloads exempt (but some digital services taxable)
Illinois: Complex — some digital goods taxable, others not
New Jersey: Digital products generally exempt
Virginia: Not taxing digital downloads

The SaaS Question

SaaS is particularly inconsistent. The same subscription software product could be:

Taxable as tangible personal property in Texas
Taxable as a service in New York
Not taxable in California
Taxable in some circumstances in Florida

If you sell SaaS or any subscription software, you need state-by-state analysis — this is genuinely one of the most complex areas in sales tax.

Other Common Exempt Categories

Farm Equipment and Agricultural Supplies

Most states exempt machinery, equipment, and inputs used in agricultural production. This typically covers tractors, irrigation equipment, seeds, fertilizer, and livestock feed. If you sell farm supplies, you likely have broad exemptions in agricultural states.

Manufacturing Equipment

Equipment used directly in manufacturing is exempt in many states. The definition of "directly used" varies — some states require the item to be part of the production process; others apply a broader standard.

Resale Items

Products purchased for resale (not for the buyer's personal use) are exempt — but the buyer must provide a valid resale certificate or exemption certificate. This exemption is buyer-side, not seller-side. As a seller, you need to collect and retain the certificate to be protected if audited.

Non-Profit Organizations

Sales to qualifying non-profit organizations are exempt in most states. Again, the buyer must provide an exemption certificate.

How to Handle Exemptions in Your Online Store

Step 1: Classify your products correctly

Every product you sell should be assigned a product tax code — a classification that tells your sales tax calculation system how to treat it. Common codes include:

General tangible personal property (fully taxable)
Groceries/food (exempt or reduced rate in many states)
Clothing (exempt in some states)
Digital goods (variable by state)
Prescription drugs (generally exempt)

Step 2: Use a sales tax tool that applies the rules automatically

Manually tracking which products are exempt in which states is not a realistic approach for most sellers. The rules change, new states update their digital goods laws, and product classifications are complex.

A sales tax calculation tool that uses product tax codes will automatically apply the right rules based on (a) what the product is and (b) where the customer is located.

Step 3: Review and audit periodically

Even with good tooling, periodic review helps catch products that may have been mis-classified or states that have updated their rules. This is especially important if you add new product categories.

Key Takeaways

Groceries are exempt in most states — but candy, soft drinks, and prepared food usually aren't.
Clothing is taxable in most states — a few exceptions (Pennsylvania, New Jersey, New York, Minnesota).
Prescription drugs are exempt almost everywhere.
Digital products are a mess — taxable in many states, exempt in others, with no consistent rule.
Product classification matters — the same physical object can have different taxability depending on how it's described or marketed.
Exemption certificates are the buyer's responsibility — but you need to collect and keep them.

Exemption rules are complex, but you don't have to manage them manually. Sails automatically applies the right exemption rules when calculating sales tax at checkout — so you collect the right amount (and don't over-collect on exempt products). Start free →

Last updated: March 2026. Sales tax exemption rules change frequently and vary significantly by state. This guide provides general educational information. Consult a qualified tax professional for advice specific to your products and business.

What Products Are Exempt From Sales Tax? A Seller's Guide