December 11, 2017
As a retailer, you may sometimes want to buy a product at retail and then turn around and resell that item to your customer. As a reseller, in most cases you should not have to pay sales tax when buying that item, as long as your vendor accepts a valid resale certificate.
Of course, as with anything having to do with sales tax and reselling, it isn’t always as simple as telling your vendor that you’re a reseller and then walking with without paying sales tax. This post will go over the fundamentals of using resale certificates to buy items at retail tax free, and help you avoid the associated pitfalls.
The Basics of Resale Certificates
A resale certificate is a document that allows businesses to buy products tax free from retailers or wholesalers. Despite its name, a resale certificate isn’t always a specific piece of paper. It’s just an authorization, issued by a state, ensuring retailers and wholesalers that you are actually a business and that they can make an exception at checkout and not charge you sales tax.
Just like with sales tax permits, resale certificates are issued at the state level. In fact, in most cases your sales tax registration number also serves as your resale certificate number. (Though in some cases states issue separate resale certificates with different registration numbers.)
Resale certificates can be used to buy items you intend to resell or lease, or component parts of items you intend to resell (like the fabric you will use to manufacture clothing) tax free.
It’s important to note that it is unlawful to use a resale certificate to buy items tax free when you do not intend to resell them. Penalties can include having to pay back the sales tax you should have paid at checkout, plus fines and penalties, or your vendor being penalized for sales tax, fines and penalties (and thus damaging your relationship with that vendor.)
Lawful use of a resale certificate example:
An online arbitrager buys products on clearance at a low price and resells them online for a profit. If this seller walks into a big box store and buys up outdoor gear on clearance, presenting a resale certificate at checkout to buy these products tax free, and then turns around and resell those items online, they have lawfully used their resale certificate.
Unlawful use of a resale certificate example:
An online furniture store owner visits an office supply store, adds shipping materials, coffee, pens, and printer paper to his cart, and tries to claim that he’s buying those items for resale. Since he doesn’t intend to resale these items at his online furniture store, he’s unlawfully attempting to use his resale certificate.
Using a Resale Certificate
To use a resale certificate, you must first be registered to collect sales tax with at least one state. This registration is your proof that you are truly a business and eligible to buy items tax free.
Most states allow vendors to accept out-of-state resale certificates. For example: Your business is based in California and so you are registered to collect sales tax in California. You visit a store in Nevada and decide to purchase 10 widgets for resale. Nevada tax law allows your Nevada-based vendor to accept your California issued resale certificate.
On the other hand, say you are based in Nevada and only have a Nevada resale certificate. You visit California and try to make a purchase for resale. California is one of ten states that doesn’t allow retailer and wholesalers to accept out-of-state resale certificates. In this case, you’d need to be registered to collect sales tax in the state of California in order to use a resale certificate with a California vendor. Here are the states/areas that don’t accept out-of-state resale certificates:
If you want to make a purchase for resale in one of these states, you’ll be required to register for a state sales tax permit and collect sales tax from all buyers in that state as well.
Also, keep in mind that not all vendors will accept your resale certificate. Vendors reserve the right to accept resale certificates at their discretion. If you do end up paying sales tax on items that you intend to resale, you can often recover that sales tax when filing your sales tax return.
Accepting a Resale Certificate
As a retailer, one of your buyers may present you with a resale certificate. In this case, it’s your job to ensure that the resale certificate is valid and to follow all applicable rules when it comes to accepting resale certificates. It’s important to follow these guidelines because, in most states, vendors will face the consequences for incorrectly failing to collect sales tax. These consequences can include owing the uncollected sales tax, plus penalties and interest.
Again, every state is different when it comes to sales tax rules and laws, but here are some rules of thumb to remember when accepting (or declining) a resale certificate:
Check that the resale certificate is from a valid state – While most states allow vendors to accept resale certificates from out-of-state, ten do not. If you are in one of those ten states (listed above), be sure not to inadvertently accept a resale certificate from an out-of-state buyer.
Verify that the resale certificate is current and valid - Ensure that your buyer has presented you with a current resale certificate, and that the buyer’s information is completely correct. Most states allow you to verify the status of resale certificates online.
Ensure the resale certificate is filled out completely – Every state is different, but most states require that your buyer fill in their registration number, name, business name, address, and type of business. In case of an audit, your auditor will want to be able to find and contact all of the buyers who presented you with a resale certificate.
Be wary of false or incorrect resale certificates – In many states, vendors who accept false resale certificates “in good faith” will not be responsible for sales tax should that certificate be later proven expired or otherwise fraudulent. However, “in good faith” includes doing some due diligence. Aside from the other items on this list, you should also make sure that the resale certificate appears legitimate. For example, if a toy store owner presents you a resale certificate claiming that they are buying a suite of bedroom furniture for resale, you have the right to be suspicious of this scenario and you can refuse to make that sale tax free.
If you have questions about using or accepting a resale certificate, we recommend contacting your state or a vetted sales tax expert for help. Have questions or something to say? Start the conversation in the comments!
About Jennifer and TaxJar
Jennifer Dunn is the Chief of Content for TaxJar, the service that makes sales tax collection, reporting, and filing simple for more than 10,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life