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8 questions about resale certificate

By / In US SALES TAX / November 30, 2023

Resale certificates let sellers buy goods from producers or wholesalers without sales tax. Typically, they buy goods for further resell these goods to final customers, who pay the sales tax at that point.

When buying, the seller presents this certificate to the supplier of goods. Then, the seller of the goods doesn’t add sales tax to the price.

These certificates can be issued for a specific supply or a whole contract.

 

Who needs a resale certificate?

A resale certificate lets you purchase things without paying sales tax, as long as you arrange to resale these goods afterward. It shows that you are a partner of the producer or seller of the goods and plan to sell them later.

You may need a resale certificate if you are:

  • A store: You buy things from makers or sellers and sell them to people who use them.
  • A distributor: You buy things from producers or sellers to sell them to other businesses that sell them to people who use them.
  • A person who sells things: You can give a resale certificate to a producer or wholesaler of the goods you sell.

 

How to get a resale certificate?

Getting a resale certificate depends on where you are but more often than not, it includes these steps:

  • Sign up for a sales tax permit.
  • Issue resale certificate using a state-specific template, fill in needed business details and details of the purchase.

Different states have their own rules that should be indicated in the certificate. Lovat platform allows the generation of resale certificates.

 

How to use a resale certificate?

Businesses should only use resale certificates for things they will sell again. It’s key to follow state laws because using them wrong can cause legal issues.

 

Resale certificate misconceptions and common mistakes

  • Using a resale certificate for personal items.

It’s not allowed to buy things for yourself with a resale certificate. A business owner did this to get office furniture and got fined in a tax check. They had to pay the sales tax, extra interest, and fines.

  • Buying items not intended for resale.

A resale certificate is for buying things you’ll sell to others. A store got fined for using it to buy things for themselves, not paying sales tax. Businesses must check what they can buy with this certificate. If a company plans to buy goods to use in business, for example laptop for its own employees, in such case sales tax must be paid there is no need to issue a resale certificate.

  • Failing to comply with state-specific resale certificate requirements.

Different states have different rules for resale certificates. A business working in many states used one certificate everywhere, which was a mistake. This caused big issues in states needing their certificates. The business had to pay overdue taxes and fines to fix this. The Lovat platform offer templates of certificates for each state.

 

Following the rules and legal points

The tax authority in your state may check on your business often. They want to make sure you use resale certificates only for goods you re-sell. You need to be ready for these checks and avoid trouble.

A good tip is to keep all your papers and receipts when you buy things with resale certificates. This will show that you are honest and compliant. If you get audited, you can prove that you did everything right.

 

Resale certificate vs. tax exemption certificate

Resale certificates and tax exemption certificates are document which is needed for buyers in the supply chain to avoid sales tax taxation.

A resale certificate shows that a buyer is going to sell a producer’s or supplier’s products. The buyer issues this certificate, which includes:

  • The buyer’s name and address;
  • Buyer’s sales tax registration number;
  • The seller’s name and contact details;
  • What products it covers;
  • When it expires.

This certificate lets a seller buy goods without sales tax, as they’ll sell them to customers who then pay the tax.

A tax exemption certificate might be issued by an entity exempt from sales tax for example School, Charity, or other exempted activity.  Such an entity must be registered with the tax office as exempted for specific types of activity.

Exemptions may be granted on the basis of the nature of the product (such as food) in such cases there is no need to issue an exemption certificate.

 

Renewal and expiration

Resale certificates are generally issued for a year. Businesses must check out for the expiration date and get new certificates before the old ones run out. If a resale certificate doesn’t have an expiration date, then a validity period is determined by the state. For example, in California certificate is valid until revoked in writing by the issuer. In Maryland certificate expires 5 years after issuance.

 

Verifying resale certificates

The seller must make sure the resale certificate is genuine and valid. This involves:

  • Checking the Permit Number: Ensure the buyer’s permit number is accurate and active.
  • Evaluating the Certificate’s Validity: Confirm that the certificate has not expired and meets state-specific requirements.
  • Record-Keeping: Maintain records of resale certificates for auditing purposes.