No business wants to spend money unnecessarily — and that includes paying unnecessary taxes. But if your business is purchasing goods to resell and you don’t have a resale certificate, you risk doing just that: paying sales tax when you purchase the goods, even though your customers will be paying sales tax when they purchase the goods.
Having a resale certificate can prevent goods from being taxed twice like this. But even with a resale certificate, complications can arise for businesses operating in multiple states.
First, let’s take a look at which states don’t accept out-of-state resale certificates, then dive into the specifics and next steps for compliance.
List of states that don’t accept out-of-state resale certificates
Currently, there are 10 states and one district that will not accept resale certificates issued by other jurisdictions and that may require businesses to obtain a state-specific resale certificate.
Businesses could also face challenges in other states — for example, Virginia. According to the Virginia Department of Taxation, sellers may accept resale certificates issued by other states, but they must contain the same information found on the Virginia’s form ST-10. Additionally, a D.C. exemption certificate (rather than a resale certificate) may not exempt a person from Virginia sales and use tax.
Nuanced rules like these highlight the importance of verifying tax laws in every state where you operate, even in those that appear to accept out-of-state certificates. This verification may be done by consulting state tax authorities or with the help of a qualified tax professional.
What is a resale certificate?
A resale certificate is a legal document that allows a business to purchase goods without paying sales tax, as long as the goods are intended for resale. These certificates effectively shift the tax liability to the end customer.
While the exact information included on resale certificates varies by state, they typically include key details about the buyer and seller and a signed statement confirming that the goods being purchased are intended for resale. Businesses must provide these certificates to vendors to claim the sales tax exemption.
In multi-state transactions, the use of resale certificates can become complicated. Although many states allow businesses to use resale certificates issued in other jurisdictions, others do not. These states will often require businesses to register and obtain a state-specific resale certificate in order to qualify for the exemption.
The process of obtaining a resale certificate also varies from state to state. In most states, businesses need a sales tax permit before they can apply for a resale certificate. To properly use these certificates and stay compliant, businesses will need to stay current on each state’s specific rules and laws, especially in areas that limit the use of out-of-state certificates.
Why some states don’t accept out-of-state resale certificates
Some states don’t recognize resale certificates issued by other jurisdictions. While statements justifying these laws might not be available, a lack of resale certificate reciprocity may stem from concerns that out-of-state certificates could be misused to avoid paying sales tax on taxable items, potentially resulting in significant lost revenue for state governments.
By requiring businesses to obtain state-specific resale certificates, local tax authorities can better monitor and document tax-exempt transactions, making it easier for them to distinguish between legitimate resale purchases and fraudulent ones.
Some states may also view restricting out-of-state certificates as a way to maintain a higher degree of control over their tax systems. By requiring in-state registration, revenue and tax departments may find it easier to enforce compliance and ensure that businesses operating within their borders are properly registered and accountable.
Although this approach benefits tax authorities, a lack of reciprocity can create a layer of complexity for businesses, especially for those operating in multiple states. Finding out which states accept out-of-state certificates can be a vital aspect of staying compliant and avoiding unnecessary penalties or taxes.
What options do businesses have in non-acceptance states?
Businesses that operate in non-acceptance states can still qualify for tax exemptions but must adhere to each state’s compliance requirements. This often involves getting a state-specific certificate or permit. Although the process for acquiring these documents varies, a business will typically need to meet specific requirements and submit an application to that state’s tax authority. For example:
- In California, businesses must apply for a seller’s permit through the California Department of Tax and Fee Administration.
- In Washington, businesses need to get a reseller permit through the Washington State Department of Revenue.
- Businesses in Florida need to acquire an Annual Resale Certificate for Sales Tax through the Florida Department of Revenue.
- Louisiana offers resale certificates through the Louisiana Taxpayer Access Point (LaTap), offered by the Louisiana Department of Revenue.
- Alabama requires resellers to fill out either form ST:EX-A1 or ST: EX-A1-SE online, through the Alabama Department of Revenue.
While there may not be any temporary resale certifications, businesses can (in some cases) expedite the permit application process. This could be done by using online services provided by a state’s tax authority or by talking to a representative directly.
Challenges of operating in non-acceptance states
Operating in areas that don’t accept out-of-state resale certificates can create several challenges for businesses, especially for ecommerce brands and SaaS companies with multi-state operations needing to observe multiple jurisdictions' tax laws.
While the specific obstacles a business will face can vary, many experience increased administrative complexity and a heightened risk of noncompliance. These challenges can drain resources, disrupt operations, and lead to substantial financial consequences if not handled properly.
Increased administrative complexity
Managing resale certificates in multiple states adds difficulty to the already complex administrative burden of multi-state operations. Businesses will need to understand and adhere to each state’s requirements for obtaining, maintaining, and renewing resale certificates. This can involve keeping careful records, including copies of certificates, receipts, and documentation of tax-exempt transactions. Companies will also need to track certificate renewal dates to avoid expiration, as lapsed or invalid certificates can result in denial of tax exemptions and noncompliance.
Higher potential for Noncompliance
Improper management or misuse of resale certificates can lead to serious consequences, including penalties, fines, an increased risk of audits, and, in some cases, criminal prosecution. Invalid, expired, or improperly completed certificates could result in unexpected tax liabilities, requiring businesses to pay sales tax on transactions that should have been exempt. In some cases, states may also demand back taxes, interest, or additional penalties for noncompliance, further increasing financial strain.
Missing or inconsistent resale certificate documents can raise red flags with state tax authorities, which could trigger an audit. These audits not only disrupt day-to-day operations, but also typically require significant time and resources to resolve. Even if a business ultimately demonstrates compliance, the associated costs can still be substantial.
Noncompliance can also affect relationships with vendors, who may face their own penalties for accepting invalid certificates. This can result in disputes, contract terminations, or damaged partnerships that disrupt supply chains and business operations. Beyond the immediate operational impact, these disruptions can also harm your company’s reputation, making it harder to secure future partnerships and maintain customer trust.
How to overcome resale certificate challenges and maintain compliance
To avoid these burdens and risks, businesses must have an effective system for managing resale certificates and other tax-related documentation. This can involve tracking when certificates need to be renewed, determining what jurisdictions recognize out-of-state certificates, and keeping accurate records to support tax-exempt transactions in the event of an audit.
While specific tools for resale certificate management may be beneficial, they often fail to address broader compliance needs, such as determining nexus, registering in different states, filing taxes, and corresponding with state tax authorities.
Tax compliance platforms like Numeral can streamline these processes by not only providing exemption certificate management but also:
- Notifying you when you reach economic nexus thresholds.
- Registering your business in applicable states.
- Automating all regular tax filings.
In addition, Numeral can handle correspondence with state agencies by scanning and responding to letters on your behalf. This can provide you with more time to focus on other, more pressing aspects of your business.
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The bottom line
Resale certificates are important legal documents that can help businesses purchase goods intended for resale without paying sales tax. Many jurisdictions accept resale certificates from other states; however, California, Florida, Alabama, Illinois, Hawaii, Louisiana, Massachusetts, Maryland, Vermont, Washington, and Washington D.C. do not. In these areas, businesses will likely need to apply for a state-specific certificate through the state’s tax authority.
Businesses operating in non-acceptance states can encounter numerous challenges, including increased administrative complexity and potential noncompliance. They can overcome these challenges by carefully managing resale certificates, as well as handling the many other aspects of compliance that each state requires. In order to do this, seeking the advice of tax professionals, contacting local tax authorities, and utilizing tax compliance platforms like Numeral may be helpful.
