In the past, products and services were primarily sold in retail brick and mortar stores, so understanding and applying appropriate local sales tax was usually quite simple. Today, the internet allows individuals and businesses to sell their goods — including goods that they’re reselling — to customers anywhere in the world.
And this makes dealing with sales tax more complicated. If your business is reselling items to your customers, understanding resale certificates is key.
As a sales tax professional, I’ve had the privilege of providing my clients guidance on many different elements of sales tax. In this article, I’ll be covering resale certificates and who can get them.
What is a resale certificate?
Resale certificates are documents that a business can supply to a vendor when they are purchasing goods, services, or property that will be resold or re-rented to their customers. This allows the business to avoid paying a sales tax (and, at the same time, prevents items from being taxed twice). Resale certificates are used in business-to-business transactions, and they help ensure that those transactions are cost-efficient.
Businesses that are reselling goods will need to have a resale certificate to avoid sales tax if they would otherwise have a tax obligation in their location or their customers.
Resale certificates are essential because they help reduce the costs of goods and services for a business. A state agency will supply or provide guidance concerning resale certificates and how they can be accessed.
Resale certificates are not to be confused with exemption certificates, which allow purchases to be exempt even if they are not resold. There are many eligibility considerations involved with exemption certificates, such as the type of goods being purchased, and whether the items are being purchased by an exempt entity. Please note that some exemption certificates include a blanket form that allows purchasers to identify the exemption reason, which could also include resold items. It’s important to understand and follow the relevant state’s procedures and complete the appropriate documentation.
Who can get a resale certificate?
Resale certificates are generally used in business-to-business transactions by retailers, wholesalers, and manufacturers. These types of businesses typically qualify for a resale certificate because the items will not be used or consumed but will be resold to an end consumer for profit. Requirements for retrieving or using resale certificates vary by state. For example, the Florida Department of Revenue requires that businesses be registered to collect sales tax before they are issued an annual resale certificate. But for several agencies, such as the Arizona Department of Revenue, resale certificates are optional.
Resale certificates are considered valid when the required information is included within a written document. Several state agencies will also allow the use of a Uniform Sales & Use Tax Resale Certificate or a Streamlined Sales Tax Agreement Certificate of Exemption that contains all of the proper exemption documentation needed for a resale. Several state agencies allow the use of your home state registration number, bypassing registration in that state. These are some of the top scenarios where resale certificates may not be needed or applicable:
- Items that will be used or consumed by the purchaser. Sales tax cannot be avoided for purchases of items that will be used by you and your employees.
- Purchasing items that do not meet the description of your business operations. It will be difficult to convince a state agency that purchased car parts will be resold to customers of an ice cream shop. (These purchases are not to be confused with items that are part of a casual sale.)
- Items purchased within a casual sale. These items are typically sold via yard sales and liquidation sales. A business could also sell depreciated equipment or retired furniture when moving to a new location.
Why is a resale certificate important?
Resale certificates allow a business or its representatives to purchase items that they intend to resell to their customers, without having to pay sales tax. This saves the business money and may allow it to sell goods at a more competitive price. Vendors are obligated to charge sales tax on taxable goods, property, or services when a resale certificate does not exist.
In situations where registration is mandatory to retrieve a resale certificate, you must understand the associated legal obligations. Registration signifies that your business will comply with that state’s rules and will charge and collect sales tax, and it gives your business nexus in that state. Your business will need to ensure that your goods, services, or property are not taxable within the state. These duties do have associated administrative costs. The obligation will also leave you open to potential audits, which could be a costly nightmare for any company, significantly more for a small business.
How to obtain a resale certificate
For many businesses, obtaining a resale certificate is a good idea, but the process varies from state to state and can take a while. In general, these are the steps:
- Register within the related or your home state for sales tax. Registration may include paying a fee. Registering requires that you provide not only business information, but also the owner’s or an officer’s personal information, such as their home address and social security number. It’s also important to understand your business and its proper categorization, such as the NAICS, first day of taxable sales, and how it impacts related tax types within the state.
- Access the provided resale certificate. As noted above, certain states provide completed resale certificates that can be accessed once you’re registered.
- Complete the optional resale exemption form or create a written document that includes the required elements. Certain states have optional forms that can be used for resale exemptions and will allow the use of the Uniform Sales & Use Tax Resale Certificate, Streamlined Sales Tax Agreement Certificate of Exemption, or written document including the required information.
Processing time and cost vary by state. Most states allow online registrations for a more efficient process. A completed and approved sales tax permit can be processed immediately or may take as long as four weeks.
How to use a resale certificate properly
Once you’ve registered, you’re ready to use your resale certificate. Remember, resale certificates can be issued to vendors when the vendor has a sales tax obligation in an origin or destination state. Submitting your resale certificate when your account with a vendor is created is a good business practice that saves a lot of headache and confusion down the road. If you can’t submit it at that time, contact your vendor’s customer service to submit it.
It’s important that each business exercise good recordkeeping and documentation on their end to substantiate their exempt sales when needed. Resale certificates' validity periods vary, so it’s also important to maintain records as long as they are valid. Best business practices dictate a recordkeeping period of four to five years, but some businesses hold on to their documentation past this point.
Each business must understand state-specific requirements, its state’s statute of limitations for audits, business contract terms, and the regulations of their industry. Renewals of resale certificates vary by state. Some state agencies automatically renew annually and will provide an updated certificate for your use without request, while other agencies may dictate that you complete another pre-filled or written document when the validity period has expired. Vendors may have their own renewal processes — for instance, a vendor may request a resale certificate each year, for their own records.
If you are presented with a resale certificate
If a business presents a resale certificate to you, the vendor, you should make sure that you validate the certificate before accepting it.
A valid resale certificate will have the business name, address, registration number, property description, exemption requirements, declaration, date, and signature.
After accepting the certificate, you should maintain a copy of the certificate and put a process in place to track expiration and renewals. If, for any reason, you, the vendor, accept an invalid certificate, the sales tax liability will fall to you and not the customer.
If you find yourself receiving an increasingly large number of resale certificates from customers, you could explore implementing an exemption certificate management solution, such as the one offered by Numeral.
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Common mistakes and misconceptions
These common misconceptions about resale certificates can get your business in trouble with state agencies or vendors. Misuse of resale certificates could lead to a state audit and additional tax due.
Misconception 1: Resale certificates can be used for non-business purchases.
Misconception 2: Resale certificates can be used for purchases that will not be resold.
Misconception 3: It is not important to completely fill out the pre-filled forms or include all required documentation in a written document.
Special cases and exceptions
There are special cases and exceptions to every rule. Please consult your specific industry and state agency to learn about any anomalies.
Frequently asked questions
- Can an individual get a resale certificate?
Yes! Individuals can receive a resale certificate if the qualifications are met. Requirements vary by state. Some states that will accept an individual’s resale certificates are California, Georgia, and Texas.
- Can online businesses also use resale certificates?
Online businesses can use resale certificates, with the understanding that the items are to be resold in the regular course of business.
- Do resale certificates apply to services?
In some cases, taxable services can be purchased without tax and resold. Examples are installation services, construction services, and professional services. Review the relevant state’s policies to ensure that services can be resold and to understand the documentation needed to validate the sale.
- How do you confirm whether a vendor accepts resale certificates?
The most efficient path for confirmation is to submit a completed resale certificate when an account is created for your business. If there is not an opportunity to provide a resale certificate in the initial phase, a business can follow up with the vendor’s customer support team to adjust the invoice.
- Do resale certificates expire?
Each state has rules pertaining to the validity of exemption certificates. Some states will issue an annual resale exemption certificate for use, while other state agencies will allow the use of the certificate indefinitely. Best business practices typically include a review cycle ranging from annually to every three years.
The bottom line
Resale certificates allow qualified businesses and individuals to purchase goods, services, or property for resale, without paying sales tax. The documents avoid double taxation and save businesses money. Requirements and obligations involved with resale certificates vary by state, and it’s important to consult with a tax professional or an applicable state agency if additional information or guidance is required.
