If you have an ecommerce business, you might have heard of Resale certificates (also called reseller’s permits) and want to know what they are, how they work, and if they are a good fit for your business. Let’s dive in and a take a look!
What are resale certificates, anyway?
A Resale Certificate is a document that allows retailers to buy items for resale without paying sales tax on those items.
If you register for a resale certificate, the state will provide you with either a customized certificate you can provide to other vendors, or just provide a resale certificate number that you use with a generic template. In either case you’ll need to give the document to a supplier for their records to buy items without paying sales tax.
How are resale certificates different from sales tax permits?
Many states are set up so your sales tax registration number also serves as your sales tax permit number, but some states require a separate resale certificate. To make sure, you should check out TaxJar’s State Resale Certificate blog series or contact your state to double-check their procedure.
So, what can I buy with a resale certificate?
You can use a resale certificate to buy any item you intend to resale or any component parts of items that you plan on reselling, such as the leather and brass hardware to make a belt that you sell on your site. Keep in mind that using a resale certificate to purchase items you do not intend to sell at retail is considered tax fraud, so be careful that you are only using resale certificates to buy items you intend to sell.
Do all retailers accept resale certificates?
Nope—retailers can use their own discretion when deciding whether or not they will accept resale certificates. The most well-known recent example of this is Target refusing to accept resale certificates to discourage retail arbitrage on products with limited availability.
Retailers are also on the hook to pay the sales taxes is the resale certificate is expired or fraudulent, which can make some retailers a bit wary when it comes to accepting resale certificates. If that happens, and your vendor will not accept your resale certificate, you can sometimes recover sales tax charged by vendors when reselling.
What about multi-state transactions?
Most of the time you can use your resale certificate from State A to buy something for resale in State B, but not always. There are ten states that will not allow retailers to accept out-of-state resale certificates. If you make a lot of purchases in those states, you may wish to consider registering for a sales tax permit in that state, but keep in mind that if you do so you’ll also be required to collect sales tax from buyers in that state.
What if I don’t end up selling the items I buy?
If you end up not reselling the items or components you purchased without sales tax, you’ll generally be required to pay a use tax. This is the amount of sales tax you would have paid had you bought the item at retail. If a use tax applies, you’ll typically pay it on your state income tax return.
What happens when someone gives me a resale certificate?
Turnabout is fair play. As a retailer, you may be presented with a resale certificate from a customer who intends to resell your products. You are responsible for deciding if you do or don’t want to accept the resale certificate. Again, if the resale certificate ends up being expired or false you will be on the hook for paying the sales tax, so if you decide to accept resale certificates you should definitely learn how to verify those certificates in each state.
You should now have a pretty good idea on whether or not using resale certificates makes sense for your business. If you’re thirsty for more information, you can visit the resale certificate section of the TaxJar blog or start the conversation in the comments!
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