How Does Sales Resale Tax Exemption Work?

Sales tax is a reality for most businesses in the United States. It’s a pass-through tax that is automatically collected from customers when transactions are finalized. 

But not all transactions are equal. 

Sales tax exemption provides a means for eligible businesses to escape the burden of paying sales tax when purchasing certain goods. Resellers, companies who are not the final users of the goods purchased, use resale certificates to make use of this resale tax exemption. 

What Is a Resale Certificate?

A resale certificate is a reseller’s golden ticket to tax savings. It exempts the holder from paying sales tax when acquiring goods that will form part of the buyer’s own inventory, whether in part or as a whole. 

Typically, those who hold resale certificates are businesses that either resell the purchased items or incorporate them into their own products. This way, only the final customers bear the sales tax burden. Resale certificates are also known as sales tax certificates, reseller permits, or sales tax exemption certificates.

Who Qualifies for Resale Certificates?

While skipping the sales tax line sounds like a dream come true to most businesses, not every business can apply for a resale certificate. 

Tax exempt resale certificates can only be used when a business regularly buys goods that will be resold in their original form or used as components in their own products or services. 

The following types of businesses are the most common holders of these resale exemption certificates:

  • Resellers 
  • Retailers 
  • Businesses with tax-exempt status, such as non-profit organizations

Now just because one of your clients falls within one of these categories doesn’t mean they are automatically exempt from sales tax. 

Businesses have to provide a state-verified resale certificate with each transaction they wish to be tax-free. Even non-profit organizations have to apply for 501(c)(3) status before they may be exempted from sales tax. 

Which States Do Not Accept Resale Certificates for Tax Exemption?

While resale certificates can provide tax relief in most states, there are a few exceptions. 

Some states do not accept out-of-state resale certificates and only offer sales tax benefits to companies with a physical presence in the state. 

The states that don’t generally accept out-of-state resale certificates include:

  • Alabama
  • California
  • D.C.
  • Florida
  • Hawaii
  • Illinois
  • Louisiana
  • Maryland
  • Massachusetts
  • Washington

In these cases, buyers will need to register for a sales tax permit with the applicable state in order to get a reseller’s number. 

Why Is It Important for Sellers to Verify Exemptions and Resale Certificates?

The onus of verifying exemption certificates lies with the seller alone. Sellers have a responsibility to verify that their buyers possess valid resale certificates. This verification process helps prevent potential sales tax issues and ensures that the certificates are legitimate.

If it comes to light that a sale was exempted from sales tax under an expired or falsified resale certificate, it is the seller who becomes responsible for paying the sales tax that should have been collected or face legal charges of tax evasion. 

Not the best scenario for a company trying to grow in troubling economic times. That’s why sellers have the right to decline buyers’ permits if their validity cannot be verified or their state does not accept an out-of-state buyer’s exemption certificate. 

How to Verify Resale Certificates When Selling Taxable Goods

Verify resale certificates when selling taxable goods, it’s crucial to:

Step 1: Check the certificate for accuracy

Make sure the details on the certificate are completed fully and accurately, including the buyer’s name, address, and sales tax ID number.

Step 2: Verify the buyer’s sales tax ID number

Verify the buyer’s resale number, which can be done online for most states. Visit the state’s Department of Revenue website and search for the buyer’s sales tax ID number.

Some states may also allow you to search by the buyer’s Federal Employer ID Number (FEIN) or any other registered business ID number.

Step 3: Confirm the expiration date of the certificate

Expired certificates cannot be used to gain exemption. Just because a business was once offered exemption doesn’t mean that privilege will be granted to them each time.

Step 4: Retain a copy of the certificate for your records

Sellers should keep a copy of the resale certificate on file to prove that tax exemption was justified in the case of an audit.

To manage these steps successfully requires sellers to understand their state’s rules on resale certificates and exemptions. And even with a thorough understanding of resale tax exemption, managing resale certificates is still a time-consuming and arduous manual process. 

 

And that’s precisely why it shouldn’t be a manual process. 

 

Ready to Streamline Your Sales Tax Management?

Navigating the intricacies of resale tax exemption and transactions completed with resale certificates can be complex, but it doesn’t have to be. 

 

Complyt is a sales tax automation platform that not only simplifies the calculator, collection, and remittance of your sales tax, it also verifies and validates resale and other exemption certificates automatically across multiple states without any form of manual intervention. 

 

Book your demo today and take a step toward stress-free sales tax compliance.