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If you are given a job offer on the spot and know that there is no way that you can take it, state that it does not meet your needs or objectives. Though it's more rare for you to be immediately hired, it can happen.  Don't lie about why you are not taking the position. You can omit information, but don't offer untruths. You should keep your credibility intact when you explain that you have decided not to take the position. If you're pretty sure that you won't take the position but not 100% sure, say that you will be in touch as soon as you make a decision. This is perfectly acceptable. If you know you won't be able to take it but feel too much pressure on the spot, ask for more time and follow up over the phone or in writing. While you're delivering the bad news, maintain eye contact, don't slouch, and don't fold your hands across your chest. Look regretful, but comfortable, not like you're squirming to get out of there. Tell the potential employer why you won't accept the position in the same way you would do over the phone. Be diplomatic, concise, and courteous. Speak slowly and clearly so you don't have to repeat yourself. Shake hands with the person who made the offer and wish them and their company the best of luck. Walk out of the office with good posture and take measured steps to show that you're not trying to run out of there. Writing a quick letter or email restating how thankful you are will make you appear even more courteous.
Be honest. Maintain appropriate body language. Explain why you're rejecting the offer. End on a good note. Follow up in writing.