What Happens If I Charge Sales Tax on Tax-Exempt Items?

So you’ve got products that are sales tax exempt, or your customer handed over a perfectly good sales tax exemption certificate—and yet your checkout system slapped tax on it. You’re not alone. But unlike mistyping an email or shipping a blue shirt when a customer ordered it in red, charging sales tax on an item that’s supposed to be exempt can be the start of a big, expensive problem… especially when the errors repeat or affect large volumes of sales.

Let’s break down what happens when sales tax gets charged on tax-exempt items—from real lawsuits to Department of Revenue guidance—and the sales tax solutions you should have in place to avoid becoming a cautionary headline.

The Cautionary Tale of the Skims Lawsuit

In January 2026, Skims Body, Inc., the apparel brand co-founded by Kim Kardashian, agreed to pay a $200,000 civil penalty to the State of New Jersey after improperly collecting sales tax on clothing that was tax exempt under New Jersey law. In New Jersey, most clothing and footwear are exempt from sales tax unless specifically excluded. However, Skims’ systems incorrectly charged tax on those items to Garden State consumers from 2019 through early 2024.

Even though the brand’s legal team called the error a “technical issue,” the settlement was tied to a finding that the improper tax charges violated New Jersey’s Consumer Fraud Act, because customers paid more than they owed. As part of the settlement, Skims agreed to:

• Pay a $200,000 civil penalty
• Implement systems to prevent future tax-on-exempt sales
• Use best efforts over the next four years to refund additional customers who paid tax in error

The key takeaway? Charging tax on items that are truly sales tax exempt—even unintentionally—can lead to state enforcement actions, financial penalties, and system changes when consumers are harmed by overcollection.

Is Charging Sales Tax on Exempt Items Illegal?

You may be thinking: My business isn’t Skims, nor am I a Kardashian—does this really apply to me? The short answer is yes.

In most states, it is unlawful to charge sales tax on items that are legally exempt. States clearly define what is taxable and what qualifies for a sales tax exemption through statutes and regulations. When sellers charge tax on exempt items, they are collecting tax without legal authority.

Even when the mistake is unintentional, consequences may include:

• Refund obligations: Sellers are typically required to refund customers for tax collected in error, either voluntarily or by state order.
• Civil penalties: States can impose fines and require you to remit improperly collected tax—plus penalties—to state coffers.
• Consumer protection enforcement: Some states, including New Jersey, treat improper tax collection as unfair or deceptive conduct.
• Interest and late fees: These can apply if incorrectly collected tax is remitted late or reported improperly.
• Sales tax permit risk: Continual or severe noncompliance can threaten your sales tax permit or lead to audits.

It’s not just sloppy bookkeeping. States treat sales tax as a trust tax, as in you’re holding the money briefly on behalf of the state and the consumer. Charging tax where none is due undermines that trust and attracts regulatory scrutiny.

How Can I Refund Wrongly Collected Sales Tax?

Oops, I charged tax on an exempt sale… now what?

If you’ve mistakenly charged sales tax on a tax-exempt item, don’t panic—but don’t ignore it either. Most states expect sellers to correct these errors promptly. Isolated mistakes are usually treated far more leniently than repeated or systemic errors.

As a general rule, states prefer refunds to be handled between the seller and the purchaser first, before involving the Department of Revenue.

Common Themes Across States

• Refund or credit the customer first. This is usually required before a seller can claim a credit or refund from the state.
• Document everything, including receipts, credit memos, and exemption certificates.
• If a seller refuses or cannot issue a refund, many states allow the purchaser to file a claim directly with the DOR.
• Refund requests are subject to strict time limits, often two to four years depending on the state.

In practice, most states begin with the assumption that wrongly collected sales tax should be returned to the consumer.

State Examples of Sales Tax Refund Procedures

Sales Tax Solutions to Save You From State Scrutiny (And Penalties)

Charging sales tax on tax-exempt items doesn’t just create refund headaches; it increases audit risk and exposure to penalties. The best defense is prevention. Sellers should focus on:

• Maintaining accurate, current exemption certificates tied to the correct customers and states
• Tracking expiration dates and required data fields (missing or expired certificates are audit magnets)

Your systems also need to understand what’s taxable and what’s exempt—by item and by state. Product taxability varies widely, and relying on manual overrides or outdated logic is a common reason sellers end up charging tax incorrectly. Strong compliance systems account for:

• Item-level taxability rules (clothing, food, digital goods, medical products, etc)
• State-specific exemptions and thresholds
• Temporary exemptions like sales tax holidays

That’s where SalesTaxSolutions.US comes in. We help businesses implement practical sales tax solutions by managing exemption certificates, aligning taxability logic with state DOR guidance, and building defensible compliance processes. The result? Fewer refunds, fewer notices, and far less attention from state tax authorities—which is exactly where you want to be.