If you are a retailer and are buying items/goods to resell these items or use the products within the things you are creating to sell, you will need a resale certificate to purchase the products tax-free.
When people purchase goods to resell them, the tax implications can get confusing and tricky. This is why there is a need for a resale certificate.
Also sometimes known as “reseller’s permits” or exemption certificates, resale certificates are issued to those registered to collect sales tax in the US. You can think of a resale certificate as a sales tax permit.
Depending on the state you are registered and do business, you will have to fill out paperwork providing information regarding your business endeavor to get a resale certificate. The information that is collected includes:
- Business contact info.
- Personal information.
- The kind of business you operate.
- The items you will be buying tax-free, among other information that may be needed, again this will depend on the state.
Understanding Resale Certificates
Just about every state has its laws and regulations regarding sales tax. Therefore, if you are a business owner and resell goods, you will want to check on your state’s laws regarding resale certificates, sales tax exemption, and any related items.
As far as the basics when it comes to an understanding of what a resale certificate is and consequently what it represents, retailers use it when they purchase items intended for resell or that they will in some way utilize as a component of a product that they are going to sell. It enables them to buy these items without having to pay sales tax. Keep in mind. It’s important to note that in purchasing products that you have no intention of reselling, a resale certificate will not be accepted.
For example, let’s say your office needs toner for the printers. If you use a resale certificate to try and avoid paying taxes on the replacement toner, this is considered an invalid purchase.
If you do try and buy items with a resale certificate and such are items that you don’t intend to sell, the vendor could be the one that gets into trouble. This is why, increasingly, some vendors refuse to accept resale certificates—for fear of buying one that may be fraudulent or used for an invalid purchase.
If it so happens that you do buy a product but don’t end up reselling that item, you will have to pay what is called a consumer use tax. When you fill out your income tax returns for the year, you will list any items purchased for which you did not initially pay tax but that you did not end up reselling for whatever reason. The consumer use tax will be calculated accordingly.
Also, keep in mind that you cannot use a resale certificate in some states in another form. There are currently ten states that will not accept out-of-state reseller permits.
So, let’s say you have a resale certificate from New York; you then go and attempt to buy a product in Illinois tax-free. The Illinois vendor cannot accept your diploma, given the state’s regulations. If you intend to purchase items tax-free in Illinois, you will have to get a sales tax permit for that specific state.
When you purchase items in your state tax-free by your resale certificate, you have to charge your buyer’s sales tax on the things they are buying.
Accepting a Resale Certificate as a Vendor
If you are a seller and a buyer comes to you with the intent of purchasing items to resell, you will have to assume the role of vendor in this instance. It is essential that you review the order and the terms carefully, as accepting a fraudulent resale certificate can get you into trouble.
If you accept the certificate in error, you will eventually have to pay the sales tax yourself on the purchased items. Make sure that the certificate is filled out completely and correctly. If there is any missing information, you probably do not want to accept it. Check with the issuing state to ensure it is legitimate. Look for a valid resale certificate number. Keep the resale certificate on file; this way, if you are ever audited, or an issue does arise, you now have tangible proof of why you did not collect sale tax on an order.
First Union Lending is here for you
We work with small business owners across the country. Our goal is to help them thrive and succeed. If you need additional working capital, we can help. Call today!