Resale certificates are a tool for every retailer’s arsenal. If you plan to buy products, then turn around and resell at retail, a resale certificate allows you to buy your inventory without paying sales tax. Just like everything in the realm of sales tax, however, each state has different rules and policies when it comes to using and accepting resale certificates.
This blog post will give you several guidelines on resale certificates in general, as well as specific examples for unusual use cases. Keep in mind you should always check your state’s policy before using a resale certificate yourself or accepting one from a buyer.
What is is a resale certificate, anyway?
Good question! A resale certificate allows retailers to purchase goods for resale without having to pay sales tax on those items. Like sales tax permits, resale certificates can go by multiple names; you might also hear them called resale licenses or reseller’s permits.
Depending on how the state operates, they will either provide you with a resale certificate number to use with a generic template or they will create a customized certificate for your business. Whichever way your state goes, you’ll need to provide a copy of the certificate for every business where you purchase goods for resale without paying sales tax.
Keep in mind that not all of your vendors will accept a resale certificate. They may simply not want to sell their inventory to resellers, or they may be concerned because vendors generally pay the consequences when accepting expired or fraudulent resale certificates. That said, most of your vendors are fine with resale certificates once they have verified them with the state’s department of revenue.
The good news is that, if the seller chooses not to allow you to use a resale certificate, you can sometimes reclaim the sales tax you paid on items after you’ve sold them at retail by filing a refund claim with the state you shipped the items to, or claim a credit for the sales tax on your next tax return. Here’s a guide to reseller sales tax recovery.
If you’re an Amazon Seller: You can choose to sell to resellers by signing up for the Amazon Tax-exemption Program (ATEP) which will allow you to receive a copy of your customer’s resale certificate from within Amazon.That means now worrying about asking the buyer for a resale certificate. Neato!
Buying products and components
You can use the resale certificate to buy pretty much any products you intend to resale without paying state sales tax. You can also buy components to make items you intend to resale.
For example, if you have a coffee roastery and tea distributor shop, you can use your resale certificate to purchase green coffee beans, bulk tea leaves, printed bags and tins, and anything else that goes directly into the end product sold to your customer without paying sales tax for those items.
Keep in mind that you can’t purchase office supplies or equipment tax free using a resale certificate. That would be considered fraud since those items aren’t intended for resale.
How is a resale certificate different from a sales tax permit?
In some cases the sales tax permit will also act as a resale certificate, but some states require a separate resale certificate. TaxJar’s State Resale Certificate blog series goes into each state’s ruling on resale certificates. You can also contact your state’s taxing authority directly to check their procedures.
Using resale certificates in multiple states
Most states allow you to use resale certificates in other states as well, but keep in mind that there are ten states that will not allow retailers to accept out-of-state resale certificates. These states are: Alabama, California, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Washington, and Washington D.C.
If you make a lot of purchases in one or more of those states, you might want to consider registering for a sales tax permit in that state. But if you choose to to register for a sales tax permit in a state, you’ll be required to collect sales tax from buyers in that state and file regular sales tax returns. Like any other part of sales tax, you’ll have to check and see what your state’s policies are and weight the pros and the cons to see what works best for your business.
What to do if you don’t end up selling the products you bought for resale
If you’re thinking about obtaining a resale certificate, another important factor to consider is what to do if you do not end up selling the items you purchased without paying a sales tax. In this case you will generally be required to pay a “use tax” that’s the same amount as the sales tax you didn’t pay. Essentially you’re paying the sales tax after the fact when filing a state sales tax return.
What if you’re handed a resale certificate by your customer?
You’re not the only business using or considering to use a resale certificate. You may find that a buyer presents you with their resale certificate to avoid paying sales tax. What do you do in that case?
Like we said above in the intro, you’re the one responsible for deciding if you do or do not want to accept resale certificates. Keep in mind that you’ll be on the hook for paying the sales tax out of your pocket if the resale certificate ends up being expired or falsified. So, if you decide to accept resale certificates you should definitely learn how to verify those certificates in each state. You’ll also want to keep the resale certificates you accept on file in case of a future sales tax audit.
The most well-known case of sellers not accepting resale certificates is Target, who won’t accept resale certificates from suspected resellers to avoid arbitrage on their limited-edition versions of game consoles, action figures, and other collectibles.
Where to go from here
By now, you probably have a pretty good idea whether or not resale certificates will work for your business. If you haven’t already, you should take a look at what your state’s policy on resale certificates is and if you’re thirsty for more knowledge, you can start the conversation in the comments below!
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