If you’ve been following this blog, you know we’ve shared a lot about online sales tax legislation and how it affects online retailers. But what about ecommerce websites that purchase items at wholesale with the purpose of turning around and selling them to consumers?
If there weren’t a special exemption, online retailers would need to pay sales tax on the wholesale items, only to turn around and have their customers pay it again when they buy their products, resulting in double taxation. This is where resale certificates come in.
How Do Resale Certificates Affect Sales Tax Collection?
Resale certificates provide a sales tax exception for registered retailers. They’re a way for the wholesaler to verify the company they’re selling to is planning to resell the items and collect sales tax during that future purchase. Note that resale certificates are not a new concept. They’ve been around since long before the Wayfair ruling, but as with everything sales tax – that ruling created some new confusion about an older concept! See below.
As Fundera explains:
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.
Resale certificates are accepted by a seller (from a true reseller) in good faith, but it is still the seller’s responsibility to be diligent about their collection. Because these certificates are issued by individual states (and filled out on their forms, in conjunction with each state’s rules), internet wholesalers need them in each state into which they sell products to ensure they are covered. The internet retailer will then need to collect sales tax when the item is purchased by a consumer.
It also gets a little complicated as you cross state lines, especially as different legislatures have developed different regulations. Many states accept what is known as a multi-jurisdictional resale certificate. That form makes it easier to do business across state lines (although we DO caution to read the fine print of the form, as different states may STILL require special reporting0). However, several states don’t accept the uniform certificate and generally require registration in the state. These “trouble states” include California, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Washington and Washington D.C.
As BigCommerce.com explains, “If you have a North Carolina resale certificate but try to buy an item tax-free in Maryland, your Maryland vendor will be unable to accept your North Carolina-issued resale certificate.”
How Did Wayfair Affect Resale Certificates?
Last year’s Wayfair Supreme Court ruling established economic nexus, which means there are additional criteria for companies to be aware of as they collect sales tax on behalf of consumers and vendors.
As the Daily Herald explains, if a company’s gross revenue exceeds a state’s economic nexus thresholds, they may need to register in that state and then collect resale certificates from vendors.
We are getting a lot of questions from clients as to why they need to register and file in a given state if all their sales are for resale. The short answer is that the economic nexus laws in most states require it – even if that means ultimately filing a “zero return” (one in which you report total sales, but net taxable sales are zero). The states want to make sure they don’t miss out on the occasional sale which is not for resale.
As with so many things related to sales tax, the important thing with resale certificates is to truly collect them and keep them in your files. Under audit, the seller is responsible for having the certificates in their records. Sometimes an auditor may be lenient and let a company go back to its customers and retroactively collect the documentation under audit, but we always recommend to clients to have them on hand currently (and update them annually, if possible). We’ve often seen auditors disallow a resale exemption without proper documentation, even if a sale is clearly for resale.
Learn More About Resale Certificates And Online Sales Tax
Do you want to know more about resales certificates, online sales tax and how they affect your business? Contact us today! This can be a little confusing and we’d be happy to share helpful details about anything relating to multi-state taxes and your company.
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
