Retail Business Owners’ Guide to Resale Certificates
As a retailer, you may want to buy a product at retail and resell it to your customer. As a reseller, in most cases you should not have to pay sales tax when buying that item, provided your vendor accepts a valid resale certificate.
As with anything relating to sales tax and reselling, it isn’t always as simple as telling your vendor you’re a reseller and then walking away without paying sales tax.
Learn the fundamentals of using resale certificates to buy items at retail tax free, and avoid the associated pitfalls, with this guide.
In this resale certificates guide:
- What is a resale certificate?
- Incorrect use of resale certificates
- Using a resale certificate
- Accepting a resale certificate
What is a resale certificate?
A resale certificate is a document that allows businesses to buy products tax free from retailers or wholesalers.
Despite its name, a resale certificate isn’t always a specific piece of paper. It can be a letter, note, or purchase order.
Whatever the document type, a resale certificate is an authorization issued by a state. It ensures retailers and wholesalers of two things:
- You are a business
- They can make an exception at checkout and not charge you sales tax
Just like with sales tax permits, resale certificates are issued at state level. In fact, in most cases your sales tax registration number also serves as your resale certificate number. However, in some cases states issue separate resale certificates with different registration numbers.
You can use resale certificates to buy tax free:
- Items you intend to resell or lease
- Component parts of items you intend to resell
What’s a component part? Something you will use to create a product – i.e. the fabric you will use to manufacture clothing.
Incorrect use of resale certificates.
Remember, it’s unlawful to use a resale certificate to buy items tax free when you do not intend to resell them. Penalties can include:
- Having to pay back the sales tax you should have paid at checkout – plus fines and penalties.
- Your vendor being penalized for sales tax, fines, and penalties (and thus damaging your relationship with that vendor).
Lawful use of a resale certificate example
An online arbitrager buys products on clearance at a low price and resells them online for a profit.
If this seller walks into a big box store and buys up outdoor gear on clearance, presenting a resale certificate at checkout to buy these products tax free, and then turns around and resell those items online, they have lawfully used their resale certificate.
Unlawful use of a resale certificate example
An online furniture store owner visits an office supply store, adds shipping materials, coffee, pens, and printer paper to his cart, and tries to claim that he’s buying those items for resale.
Since he doesn’t intend to resale these items at his online furniture store, he’s unlawfully attempting to use his resale certificate.
Using a resale certificate.
To use a resale certificate, you must first be registered to collect sales tax with at least one state. This registration is your proof that you are truly a business and eligible to buy items tax free.
But a resale certificate isn’t a specific document. It could be a:
- Pre-printed form
- Purchase order
But for those documents to qualify as a resale certificate they must include certain information. This can differ between state, but always includes:
- Purchaser’s name and address
- The purchaser’s seller’s permit number
- Their type of business
- Description of the goods they are purchasing for resale
- The purchaser’s signature and title, dated
Rules for resale certificates across states.
Most states allow vendors to accept out-of-state resale certificates. But there are 10 states that don’t. This table provides an example of a state that does allow them (left-hand side) and an example of a state that does not (right-hand side).
Out-of-state resale certificates allowed — example
Your business is based in California and so you are registered to collect sales tax in California.
You visit a store in Nevada and decide to purchase 10 widgets for resale. Nevada tax law allows your Nevada-based vendor to accept your California issued resale certificate.
Out-of-state retail certificates not allowed — example
You are based in Nevada and only have a Nevada resale certificate.
You visit California and try to make a purchase for resale. California is one of 10 states that doesn’t allow retailer and wholesalers to accept out-of-state resale certificates.
In this case, you’d need to be registered to collect sales tax in the state of California in order to use a resale certificate with a California vendor.
States that don’t accept out-of-state resale certificates.
California is one of 10 states that don’t accept out-of-state resale certificates. Here is that list in full:
- Washington, D.C.
If you want to make a purchase for resale in one of these states, you’ll be required to register for a state sales tax permit and collect sales tax from all buyers in that state as well.
Also, not all vendors will accept your resale certificate.
Vendors reserve the right to accept resale certificates at their discretion. If you do end up paying sales tax on items that you intend to resale, you can often recover that sales tax when filing your sales tax return.
Accepting a resale certificate.
As a retailer, one of your buyers may present you with a resale certificate. In this case, it’s your job to ensure the resale certificate is valid and to follow all applicable rules when it comes to accepting resale certificates.
It’s important to follow these guidelines because, in most states, vendors will face the consequences for incorrectly failing to collect sales tax. These consequences can include owing the uncollected sales tax, plus penalties and interest.
4 things to remember when accepting (or declining) a resale certificate.
Again, every state is different when it comes to sales tax rules and laws, but here are some rules of thumb to remember when accepting (or declining) a resale certificate:
- Check the resale certificate is from a valid state.
While most states allow vendors to accept resale certificates from out-of-state, 10 do not. If you are in one of those 10 states (listed above) be sure not to inadvertently accept a resale certificate from an out-of-state buyer.
- Verify the resale certificate is current and valid.
Ensure your buyer has presented you with a current resale certificate, and the buyer’s information is completely correct. Most states allow you to verify the status of resale certificates online.
- Ensure the resale certificate is complete.
Every state is different, but most states require your buyer to fill in their:
- Registration number
- Business name
- Type of business
In case of an audit, your auditor will want to be able to find and contact all the buyers who presented you with a resale certificate.
- Be wary of false or incorrect resale certificates.
In many states, vendors who accept false resale certificates “in good faith” will not be responsible for sales tax should that certificate be later proven expired or otherwise fraudulent.
However, “in good faith” includes doing some due diligence. Aside from the other items on this list, you should also make sure the resale certificate appears legitimate.
For example, if a toy store owner presents you a resale certificate claiming they are buying a suite of bedroom furniture for resale, you have the right to be suspicious of this scenario and refuse to make that sale tax free.
If in doubt, speak to a tax expert. If you have questions about using or accepting a resale certificate, we recommend contacting your state or a vetted sales tax expert for help.
Frequently asked questions about resale certificates.
How do I get a US resale certificate?
To create a US resale certificate you need your sales tax registration number. This number is allocated by tax officials in your state, rather than by US federal government. To get one, apply to your state’s tax agency and they can provide you with a license including that number.
You can then use that number to create your own resale certificate by including that — along with other information — on the resale certificate document such as a letter or purchase order.
Who needs a California resale certificate?
If you are a seller based in California who is buying goods to sell on with reduced tax then you will need a resale certificate. To get a resale certificate you need a seller’s permit, issued by California Department of Tax and Fee Administration.
If you use a resale certificate to avoid paying tax on products you intend to use rather than sell on then you will be breaking state law and may face fines or other penalties.
A resale license is your state’s tax department issues to you after you apply for a sales tax registration number. That number is printed on to a resale license document so you can use it to show you are legally allowed to purchase goods wholesale and sell on without paying sales tax.
The resale license is therefore different to the resale certificate. The number on the resale license is something you include on your resale certificate to validate it as document.