As an online seller, unless you completely fabricate and manufacture the items you sell, then you most likely deal with a resale certificate.
Issued by your state and similar to a sales tax permit, a resale certificate (AKA seller’s permit) allows you to buy items without paying sales tax.Seems like a sweet deal, right? Well, it is! But there’s a little more to using resale certificates than simply walking into a store and walking out with an armful of new, tax-free inventory. Let’s dig into the seven things resellers need to know about resale certificates.
1. Resale certificates are related to your sales tax permit
Unless you have special circumstances, such as living in a state with no sales tax, then you’ll generally need to hold a sales tax permit in order to use a resale certificate. Often, states will either issue you a separate document or ID number to use as a resale certificate, or you will just print or fill out a resale certificate using your sales tax ID number.
Since you give resale certificates to a variety of retailers, you’ll need a copy for each instance in which you use it. This is as opposed to sales tax, where you are supposed to hang on to and display your sales tax permit. Some states offer free downloads of resale certificate templates to use if you search for “your state” + “resale certificate.”
Here’s an example of a Minnesota resale certificate:
2. Resale certificates are governed at the state level
Just like with sales tax permits, resale certificates are governed at state level. Each state will have slightly different rules and regulations when it comes to using and accepting resale certificates. So if for some reason you are using a resale certificate in another state, be sure you know that state’s rules and regulations when it comes to using resale certificates.
3. Resale certificates can only be used for very specific purchases
While every state is slightly different, the general rule of thumb is that you can only use resale certificates to buy either:
• Items you intend to resell
• Component parts you plan to use directly in items you intend to resell
As an example, you could use a resale certificate to buy clothing you intend to resell, or fabric you intend to use to make clothing you intend to resale. But, you could not use a resale certificate to purchase clothing you intend to wear or the scissors you plan to use to create clothing to sell. (These items can be written off on your business income taxes, but that’s enough for a whole different blog post!)
Rule of Thumb: As a reseller, you are allowed to purchase items tax free for resale as long as you plan to charge sales tax on those items when you resell them.
4. Sellers will verify your resale certificate
In many states, if a seller makes a tax free sale to a buyer who presents an expired or otherwise invalid resale certificate, then the seller is on the hook to pay the sales tax they didn’t charge the buyer.
As you can imagine, the threat of paying sales tax out of pocket creates a pretty strong incentive for sellers to be sure that a buyer’s resale certificate is not fraudulent or expired. Because of this, most states have a way for sellers to quickly verify the authenticity of a resale certificate online.
Though keep in mind that in a handful of states the buyer is on the hook to pay sales tax if you attempt to use a fraudulent or expired resale certificate. (Not that anyone reading this blog post would try that on purpose!)
5. Nine states (plus Washington, D.C.) will not allow sellers to accept out-of-state resale certificates
In most states, as long as you have a valid resale certificate in one state, you can use that certificate to make purchases tax free for resale. But nine states — Alabama, California, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, and Washington — along with Washington D.C. do not allow out of state resale certificates.
So in those states, if you want to use a resale certificate, you need to be registered to collect sales tax in that state. There are pros and cons to this.
The pro, of course, is that you can use your resale certificate for tax free inventory purchasing. The con is that you will also be required to collect sales tax from buyers in that state, and file periodic sales tax returns.
It’s up to you as the business owner to decide whether or not the administrative hassle of collecting and filing sales tax is worth being able to buy items for resale tax free.
6. Sellers can choose whether or not to accept your resale certificate
You may have tried to use your perfectly valid, unexpired resale certificate at a store and been denied. This is because retailers are allowed to refuse retail certificates at their discretion.
Target, for example, is notorious for refusing to accept resale certificates from retailers they suspect are doing retail arbitrage. As I mentioned above, retailers are often on the hook if they accept an invalid resale certificate, and some have chosen to avoid the hassle altogether.
7. You can sometimes recover sales tax you paid on items for resale
If you run into a situation where you’re buying items for resale but your resale certificate isn’t accepted, you can sometimes recover that sales tax when filing your sales tax return. This applies in limited situations, however, so check out CPA Ned Lenhart’s post on recovering sales tax paid for some guidance.
Mark Faggiano is the founder and CEO of TaxJar, a service that makes sales tax reporting and filing simple for more than 5,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!