If you are a reseller in the states and a business has agreed for you to resell their product, you might need to obtain a resale certificate. In some states, this certificate is the same number as the sales tax identification and it allows resellers to avoid paying taxes on items, products, or goods that they intend to resell. There are legalities to the resale certificate, and each of these will depend on the state where the business operates as well as where the customer is located.
What is a Resale Certificate?
A resale certificate, also referred to as a reseller’s permit or exemption certificate, is a signed certificate that indicates that a business (or the purchaser) can resell goods. This certificate verifies that you are a “legitimate retailer” or purchaser and that your business intends to resell products (or a component of products). This certificate is usually provided by a retailer to a wholesale dealer, but manufacturers can also issue resale certificates to those who supply materials if the suppliers become incorporated into the product. To take advantage of the reseller certificate, you’ll most likely need to be registered to collect sales tax in at least one U.S. state. The resale certificate might also be considered the same as the business’ sales tax permit (or sales tax license). If you use the resale certificate and do not resell the product, you will likely be required to pay a consumer use tax on that taxable item, which is usually paid when you file your state income tax return (or as a separate filing if your state does not have income tax).
Why Do I Need a Resale Certificate?
The main reason for obtaining a resale certificate is to legally avoid paying taxes on items that you intend to resell. It is illegal to purchase a product using the resale certificate and not resell it. Additionally, once you do resell it, you are required to collect the appropriate tax from the customer.If you do not obtain a resale certificate you would be forced to pay taxes on the products that you purchase. With a reselling business, you want to maximize the profit margins, so paying taxes on an item that you don’t intend to use or keep does not make sense. As a reseller, you will likely need to collect sales taxes (especially considering that many states require that you collect taxes even after making USD 1 in revenue). Therefore, you might automatically get a resale certificate when you register your business for a sales tax number (i.e., sales tax ID), or the state might ask you if you are intending to operate as a reseller when applying for the sales tax number. How this process works, and whether or not you will be issued one or two identification numbers will depend on the state. Note that an employer identification number (EIN) is different from a sales tax ID.
How Do I Obtain a Resale Certificate?
Obtaining a resale certificate is simple and can be done online, over the phone, or in-person with your state’s Department of Revenue. You can also perform a Google search for your state to find the relevant information. However, it’s easiest to go through a registered agent or a formation services business. Your LLC or corporation might require a registered agent in order to operate; if this is the case, you should inquire as to whether you need a sales tax identification number and, if you do, have them request a resale certificate on behalf of your business. Salehoo created a handy map, which allows users to click on their state to be redirected to their state’s website for tax and resale certificate registration. Forty-five U.S. states and Washington DC each have their own state laws around collecting taxes, so it’s vital that you verify that you need to collect tax and how exactly the process works. If you operate in a state like Oregon, Alaska, or Montana, no sales tax is required and you won’t need to register for a resale certificate. Note that as of 2020, 10 states do not allow vendors to accept resale certificates from sellers who are out of state. So, for example, vendors in Alabama, California, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Washington, and Washington D.C. do not allow vendors to accept or approve resale certificates from out of state. Instead, you would have to register for a sales tax permit within that state. Like sales tax numbers, the resale certificate can only operate in the state in which it is issued.
What Information Do I Need to Obtain a Reseller Certificate?
The registrant will be filling out a form in order to obtain this certificate, and should be prepared to present the following information:
- The seller’s business name
- The seller’s business address
- Your state’s sales tax registration number (which is usually in the same state where you are applying for the certificate)
- Description of tangible personal property or services purchased
- Your business information (as the purchaser)
Here is an example of Arkansas’s Resale Exemption Certificate form. Since you are a purchaser and you are seeking a legal way to avoid paying taxes on a product, you will need to have the seller’s permission in order to resale. This is especially pertinent because they will be required to sign off on allowing your business to resell their products. Be sure to contact the seller prior to registering for a reseller certificate to ensure that this is okay. Additionally, the seller (otherwise known as the vendor) is on the hook for faulty or fraudulent resale certificates, so the seller may refuse your offer.