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A resale certificate is a document that allows retailers to purchase goods for resale without having to pay local sales tax for those items. With a resale certificate, it’s the seller’s responsibility to collect the appropriate sales tax from the customer when you sell the items. Without a resale certificate, the purchaser must pay sales tax on the items they intend to resell.
A common ecommerce business model is to purchase goods wholesale and then sell them online at a markup. However, sales tax can often complicate this plan. To get around paying sales tax on items they plan to resell, ecommerce merchants should acquire a resale certificate. A resale certificate provides a sales tax exemption to merchants who purchase products or components of products they plan to resell. Let’s learn a bit more about the particulars of resale certificates.
So far we know this much: A resale certificate (also called a tax exemption certificate) lets retailers purchase goods for resale without having to pay sales tax for those items.
But let’s dive a little deeper.
Depending on your state, 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. Either way, you’ll need to provide a copy of the certificate for each business where you purchase goods for resale without paying sales tax, showing proof that what you’re purchasing is for resale.
When you purchase goods with a resale tax certificate, you’ll also need to be sure to collect the exempted tax when you sell the products. Resale certificates usually state your name and address as the buyer, the reseller’s permit number, a description of the purchased item, and a statement that the item in question is being purchased for resale.
Because resale certificates involve state sales tax, the way you use a resale certificate varies by the state you operate in.
Avoiding paying sales tax as a seller yourself sounds pretty great. But how do you get a resale certificate?
You can apply for a resale certificate through your state’s tax department. Be sure to apply to the state tax department in the state you physically have an address in—not the state in which you incorporated, if it’s different. If you sell products in more than one state, you’ll have to apply for a resale certificate in every single state you do business in. If you’re operating in a state that’s different than the state in which you incorporated, you’ll need to complete a Foreign Qualification process to be able to do business in a different state.
It’s important to note that you’ll need a copy of your resale certificate for every instance in which you use one. That means if you do business with multiple wholesalers, you’ll need a resale certificate for each one.
Now that you have a general overview of resale certificates, let’s cover some of the details with frequently asked questions about these documents.
Most of the time, a resale certificate and a sales tax permit are referring to the same thing. Sometimes the sales tax permit acts as a resale certificate, and sometimes you are required to have both a sales tax permit and a resale certificate. For example, if you live in a state with no sales tax, then you’ll typically need to have a sales tax permit to use a resale certificate.
Remember, you’ll need a separate resale certificate for every different seller you work with. This is different than protocol with a sales tax permit, where you have a single permit that you hang onto and display when needed. To find out the procedures for your state, you should contact your state directly to see their requirements.
You can buy any products that you intend to put up for resale or components to make items you intend to resell. For example, if you are a jewelry designer, you can purchase gem stones tax free to fashion into jewelry for your customers.
Just keep in mind that you can’t purchase items you do not intend to resell—like equipment or office supplies—without paying a sales tax using a resale certificate. In this case, that would be considered tax fraud (Those items, however, can be income-tax deductions, but that’s a whole different tax matter).
When it comes down to it, you can purchase items with a resale certificate when you intend on charging sales tax on the items when you resell them.
Many retailers accept resale certificates, but not all—it’s completely up to the business whether they do or don’t accept resale certificates. Retailers are on the hook to pay lost sales tax if it turns out that the resale certificate is expired or false.
You’ll also find situations where retailers choose not to accept resale certificates to discourage retail arbitrage, such as Target trying to discourage people from buying rare items to sell online with a huge markup.
Most of the time you can use a resale certificate in multiple states, but there are 10 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. Keep in mind that if you choose to register for a sales tax permit that you’ll be required to collect sales tax from buyers in that state, so you’ll have to weigh the pros and the cons to figure out if that route works for your business.
A multi-jurisdictional resale certificate (or a blanket retail certificate or uniform sales tax certificate) can be used to help businesses that purchase goods for resale in multiple states avoid having to use different resale certificates for different states and vendors. If you do choose to use multi-jurisdictional resale certificates, be sure you’re doing so correctly. If misused, you risk delaying your payment or shipment of the goods or being charged the sales tax you were trying to avoid.
This specific resale certificate produces a lot of confusion for buyers and sellers, so make sure you read up on how to use one correctly before you pursue this type of resale certificate. Some of the most important guidelines when using multi-jurisdictional resale certificates are to be sure not to apply it to non-sales tax exemptions, such as agriculture or manufacturing. You should also stay informed as to which states are still accepting multi-jurisdictional resale certificates, as states may change their policies for acceptance of the certificate without notifying the Multistate Tax Commission.
Finally, read the terms and conditions of your multi-jurisdictional resale certificate. The fine prints includes all sorts of caveats and exceptions for usage of your certificate.
If you don’t sell the items or components you purchased without sales tax by the end of your filing period, you’ll generally be required to pay a use tax that corresponds to the same amount as the sales tax you didn’t pay. Basically you’re paying the sales tax when you file a state sales tax return.
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.
Keep in mind that 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 perform some sort of resale certification verification, which will be different for each state. You’ll also want to keep the resale certificates on file in case there are any issues or in the event of a sales tax audit.
A resale certificate is a great way to circumvent sales tax headaches when selling products online. When applying for a resale certificate, make sure you understand your state’s guidelines. If you sell products in more than one state, you have to get a resale certificate for each state you sell products in—unless you have a multi-jurisdictional resale certificate. Also remember that you need a resale certificate for each individual vendor that you do business with.
With a resale certificate in hand, you’ll be able to spend more time growing your ecommerce operation and less time worrying about sales tax. For additional insight into how to grow your ecommerce business, read our guides on how to fund an ecommerce business and the best accounting software for ecommerce businesses.