What is a Resale Certificate?
A resale certificate is a
document proving that you are a legitimate retailer or purchaser and are buying
products to either resell or use as component parts of products you plan to
resell.
To use a resale certificate,
you generally need to be registered to collect sales tax in at least one US
state.
Resale certificates are also
sometimes called “reseller’s permits” or sometimes just the blanket term
“exemption certificates.”
Your resale certificate is
generally the same thing as your sales tax permit (sometimes called sales tax
license.)
However, in some cases, a
state may issue a reseller a separate “resale certificate” number.
Though it has the word
“certificate” in the name, a resale certificate these days isn’t always a
specific piece of paper.
While some states do issue
retailers a specific resale certificate to present to their vendors, most just
require that you fill out certain information.
The Typical Information You Need For a
Reseller Certificate:
- Your business identifying
details
- Your personal identifying
details.
- The type of business you
operate.
- What types of items you are
buying tax-free.
- A signature verifying that you
are making the purchase in good faith and truly intend to resell the items
you are purchasing.
Resale Certificate Pro Tips
Forty-five US states and Washington DC all have their own sales
tax rules and laws.
We always recommend you read
your state’s rules of resale certificates.
In general, though, retailers can use resale certificates to buy
products they either intend to resell or rent, or components of products they
intend to resell.
However, it is unlawful to use a retail certificate to purchase
items you do not intend to sell.
For example, office paper or printer ink purchased with a resale
certificate (unless, of course, you own an office supply store and intend for
those items to be resold) is not valid.
To avoid a hassle, always fill out the resale certificate
completely before presenting it to your vendor.
Vendors are often the ones on the hook for unpaid sales tax
should they accept a faulty or fraudulent resale certificate from a buyer.
This is why some retailers may refuse to accept a resale
certificate.
Target, for example, is known for attempting to curb online
competition by refusing resale certificates from any suspected reseller.
If you use a resale certificate to purchase an item, but do not
end up selling it, your state requires that you pay “consumer use tax” on the
taxable item.
This is generally paid at the time you file your state income
tax return. This may be a separate filing if your state does not have an income
tax.
It’s also important to note that ten US states will not allow
vendors to accept resale certificates that were issued out of state.
The 10 US States That Do Not Accept Out of State Resale
Certificates:
1. Alabama
2. California.
3. Florida.
4. Hawaii.
5. Illinois.
6. Louisiana.
7. Maryland.
8. Massachusetts.
9. Washington.
10.
Washington D.C.
For example, if you have a North Carolina resale certificate but
try to buy an item tax-free in Maryland, your Maryland vendor will be unable to
accept your North Carolina-issued resale certificate.
To buy an item tax-free from a vendor in Maryland or any of the
other states on the above list, you will be required to register for a sales tax permit in that state.
Note that if you hold a sales tax permit from a state, not only
can you buy items tax-free from vendors in that state, but you are also
required to charge sales tax to your own buyers in that state.
Weigh the pros and cons before registering for a new sales tax
permit/resale certificate.
How to Accept a Resale Certificate from a
Buyer
As an online seller, sooner or later you will potentially run
into another reseller or purchaser who would like to buy from you.
In this case, it’s time to take your duties as a vendor
seriously and meticulously review the purchase order.
In most cases, if you erroneously fail to charge sales tax, you
will be on the hook to pay the sales tax you didn’t collect out of your pocket.
Here are a few pro tips for accepting a resale certificate from
a buyer without finding yourself in sales tax hot water.
1. Ensure the resale certificate is filled out
accurately and completely – In the event of an audit, auditors will scrutinize
resale certificates. Be sure each resale certificate you accept is completely
filled out, including the signature.
2. Verify that the resale certificate is
legitimate – Most states allow vendors to verify a resale certificate online.
This allows you to double check that your customer provided you with a valid
resale certificate number and that the certificate is not expired.
3. Make a good faith effort to ensure the purchase
is valid – Let’s say someone presents you with a resale certificate. They say
that they own a store that sells pet supplies, but they are purchasing a new
suite of bedroom furniture for “resale.”
It’s likely that this purchase is invalid, and you can refuse the resale
certificate. If you do not refuse the resale certificate, you can find yourself
on the hook to pay the sales tax you did not collect.
The good news is that states don’t require you to become a private detective,
so if the customer falsifies the document, you can claim innocence as long as
you made a good faith effort to verify the certificate.
4. Keep the resale certificate on file – How
often you should keep the documents vary, but most states require that you keep
resale certificates on file for 5 years. In case of a sales tax audit, they
will help you prove why you did not collect sales tax from a specific customer.
I hope this post has helped explain when and how to use and
accept resale certificates in your online business.