If you sell products, chances are you’ve dealt with a resale certificate. Resale certificates are issued by your state and allow you to buy items from wholesalers or other retailers without paying sales tax as long as you plan to resell those items.
But – as with anything tax related – there’s a lot more to using resale certificates than simply getting to buy items tax free. This post will provide the lowdown on what online sellers need to know about resale certificates.
Resale Certificates 101
In order to use a resale certificate, you first must be registered with your state to collect sales tax. Each state governs sales tax and reseller’s certificates a little differently, so depending on your state you may have to follow different rules and regulations when it comes to obtaining and using resale certificates.
In the majority of cases, resale certificates go hand-in-hand with your sales tax permit. They will almost always use the same sales tax permit or account number. In a handful of states, a resale certificate (or reseller’s number) is a separate document that you must request from your state after registering to collect sales tax.
Once you have a valid resale certificate you can use it to avoid paying taxes on items you buy at retail – as long as you truly plan to resell those items. Most wholesalers will require a resale certificate before you can make a purchase.
Myth: A resale certificate is a single document.
Fact: Resale certificates take many forms. Since you are required to give resale certificates to many different vendors, they are not usually a single document. Often, your vendor will give you a resale certificate document to fill out. In other cases, you can print out a state resale certificate template online. As with anything sales tax related – it all depends on how your state chooses to handle resale certificates.
Restrictions on Using Resale Certificates
Though I can’t reiterate enough that every state is slightly different, for the most part you are restricted to using resale certificates for items you either intend to directly resale or items that you will use as component parts in items you intend to resale.
When it’s okay to use a resale certificate:
- You are buying baby cribs from a local store and plan to sell them online for a higher price
- You are buying wood expressly in order to build baby cribs that you then plan to sell online
When it’s not okay to use a resale certificate:
- When you are buying items to keep for yourself
- When you are buying supplies that you will use in your business (paper, pens, a hammer, etc.) but do not intend to either resale or use as a component in an item you intend to resale
A general rule of thumb is to remember that the state wants the end user to pay sales tax on the sale. So, when using a resale certificate, be sure you are only buying items that will later be sold and taxed.
Resale Certificates in Another State
Some online sellers do “retail arbitrage,” where they buy items from retailers and sell them online at a higher price. Retail arbitrage is just one of many examples of when you, as an online seller, may make a purchase for resale in a different state. In most states, you are in luck. Retailers and wholesalers are allowed to accept your out-of-state resale certificate.
But ten states are not as friendly. In these ten states that don’t allow out-of-state resale certificates, if you want to buy items for resale tax free, then you are required to register for a sales tax permit in that state.
Stores that Don’t Accept Resale Certificates
Some retailers – Target is a notorious example – reserve the right to refuse resale certificates. They have the right to do this. In fact, in many states, should a buyer provide a false or fraudulent resale certificate, the retailer is on the hook for the sales tax a buyer did not pay. This can be a major deterrent for retailers who have been burned by fraud in the past.
In some cases, if you were made to pay sales tax on items that you intended to resell, you can recover the sales tax you paid.
This is the just the tip of the iceberg when it comes to using resale certificates. Do you have questions or something to say? Start the conversation in the comments!
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