As a retailer, you may sometimes want to buy a product at
retail and then turn around and resell that item to your
customer. As a reseller, in most cases you should not have to
pay sales tax when buying that item, as long as your vendor
accepts a valid resale certificate.

Of course, as with anything having to do with sales tax and
reselling, it isn’t always as simple as telling your vendor
that you’re a reseller and then walking with without paying
sales tax. This post will go over the fundamentals of using
resale certificates to buy items at retail tax free, and help
you avoid the associated pitfalls.

The Basics of Resale Certificates  

A resale certificate is a document that allows businesses to
buy products tax free from retailers or wholesalers. Despite
its name, a resale certificate isn’t always a specific piece of
paper. It’s just an authorization, issued by a state, ensuring
retailers and wholesalers that you are actually a business and
that they can make an exception at checkout and not charge you
sales tax.

Just like with sales tax permits, resale certificates
are issued at the state level
. In fact, in most cases
your sales tax registration number also serves as your resale
certificate number. (Though in some cases states issue separate
resale certificates with different registration numbers.)

Resale certificates can be used to buy items you intend to
resell or lease, or component parts of items you intend to
resell (like the fabric you will use to manufacture clothing)
tax free.

It’s important to note that it is unlawful to use a resale
certificate to buy items tax free when you do not intend to
resell them. Penalties can include having to pay back the sales
tax you should have paid at checkout, plus fines and penalties,
or your vendor being penalized for sales tax,
fines and penalties (and thus damaging your relationship with
that vendor.)

  • Lawful use of a resale certificate
    example:

    An online arbitrager buys products on clearance at a low
    price and resells them online for a profit. If this seller
    walks into a big box store and buys up outdoor gear on
    clearance, presenting a resale certificate at checkout to
    buy these products tax free, and then turns around and
    resell those items online, they have lawfully used their
    resale certificate.

  • Unlawful use of a resale certificate
    example:

    An online furniture store owner visits an office supply
    store, adds shipping materials, coffee, pens, and printer
    paper to his cart, and tries to claim that he’s buying
    those items for resale. Since he doesn’t intend to resale
    these items at his online furniture store, he’s unlawfully
    attempting to use his resale certificate.

Using a Resale Certificate

To use a resale certificate, you must first be registered to
collect sales tax with at least one state. This registration is
your proof that you are truly a business and eligible to buy
items tax free.

Most states allow vendors to accept out-of-state resale
certificates. For example: Your business is based in California
and so you are registered to collect sales tax in California.
You visit a store in Nevada and decide to purchase 10 widgets
for resale. Nevada tax law allows your Nevada-based vendor to
accept your California issued resale certificate.

On the other hand, say you are based in Nevada and only have a
Nevada resale certificate. You visit California and try to make
a purchase for resale. California is one of ten states that
doesn’t allow retailer and wholesalers to accept out-of-state
resale certificates. In this case, you’d need to be registered
to collect sales tax in the state of California in order to use
a resale certificate with a California vendor. Here are the
states/areas that don’t accept out-of-state resale
certificates
:

  • Alabama

  • California

  • Florida

  • Hawaii

  • Illinois

  • Louisiana

  • Maryland

  • Massachusetts

  • Washington

  • Washington D.C.

If you want to make a purchase for resale in one of these
states, you’ll be required to register for a state sales tax
permit and collect sales tax from all buyers in that state as
well.

Also, keep in mind that not all vendors will accept your resale
certificate. Vendors reserve the right to accept resale
certificates at their discretion. If you do end up paying sales
tax on items that you intend to resale, you can often
recover that sales tax when filing your sales tax return
.

Accepting a Resale Certificate

As a retailer, one of your buyers may present you with a resale
certificate. In this case, it’s your job to ensure that the
resale certificate is valid and to follow all applicable rules
when it comes to accepting resale certificates. It’s important
to follow these guidelines because, in most states, vendors
will face the consequences for incorrectly failing to collect
sales tax. These consequences can include owing the uncollected
sales tax, plus penalties and interest.

Again, every state is different when it comes to sales tax
rules and laws, but here are some rules of thumb to remember
when accepting (or declining) a resale certificate:

  1. Check that the resale certificate is from a valid
    state
    – While most states allow vendors to accept
    resale certificates from out-of-state, ten do not. If you
    are in one of those ten states (listed above), be sure not
    to inadvertently accept a resale certificate from an
    out-of-state buyer.

  2. Verify that the resale certificate is current and
    valid
    –  Ensure that your buyer has presented
    you with a current resale certificate, and that the buyer’s
    information is completely correct. Most states allow you

    to verify the status of resale certificates online
    .

  3. Ensure the resale certificate is filled out
    completely
    – Every state is different, but most
    states require that your buyer fill in their registration
    number, name, business name, address, and type of business.
    In case of an audit, your auditor will want to be able to
    find and contact all of the buyers who presented you with a
    resale certificate.

  4. Be wary of false or incorrect resale
    certificates
    – In many states, vendors who accept
    false resale certificates “in good faith” will not be
    responsible for sales tax should that certificate be later
    proven expired or otherwise fraudulent. However, “in good
    faith” includes doing some due diligence. Aside from the
    other items on this list, you should also make sure that
    the resale certificate appears legitimate. For example, if
    a toy store owner presents you a resale certificate
    claiming that they are buying a suite of bedroom furniture
    for resale, you have the right to be suspicious of this
    scenario and you can refuse to make that sale tax free.

If you have questions about using or accepting a resale
certificate, we recommend contacting your state or a
vetted sales tax expert
for help. Have questions or
something to say? Start the conversation in the comments!

About
Jennifer and TaxJar

Jennifer Dunn is the Chief of Content for TaxJar, the service
that makes sales tax collection, reporting, and filing simple
for more than 10,000 online sellers. Try a 30-day-free trial of
TaxJar 
today and eliminate sales tax compliance
headaches from your life