Are Resellers Tax Exempt? How Sales Tax Law Works

Resellers often encounter questions about sales tax exemptions. This exemption refers to two distinct scenarios within sales tax law. First, it addresses how resellers can avoid paying sales tax when acquiring items for resale. Second, it pertains to a reseller’s obligation to collect sales tax from customers upon the final sale of goods.

Purchasing Items for Resale Without Sales Tax

Resellers can purchase inventory without incurring sales tax by using a resale certificate. This document certifies to a supplier that items are intended for resale, exempting the transaction from sales tax at the wholesale level. This prevents “double taxation,” ensuring sales tax is collected only once, from the end consumer.

Obtaining a resale certificate begins with registering your business with the state’s department of revenue or equivalent tax authority, which involves securing a sales tax permit. Many states provide these certificates through online portals or as downloadable forms. The application process requires providing business details, such as the legal business name, address, and your federal Employer Identification Number (EIN) or state sales tax ID number.

When completing the certificate, describe your business activities and the type of property or services you intend to purchase for resale. A clear statement confirming the items are for resale is a common requirement. The certificate requires the date and the signature of an authorized individual from your company. Some states provide an annual certificate, while others require a certificate for each transaction or vendor.

Once a resale certificate is completed, present it to your suppliers. For regular suppliers, a single “blanket” certificate might cover all future purchases, but some states require specific documentation for each transaction. Keep accurate records, including copies of all resale certificates provided to vendors, for audit purposes. If an item purchased with a resale certificate is later used for personal or business consumption rather than resale, the reseller becomes responsible for paying use tax on that item.

Collecting Sales Tax as a Reseller

While resellers do not pay sales tax on items purchased for resale, they must collect sales tax from customers when items are sold to the final consumer. This responsibility arises when a reseller establishes “nexus” in a state, signifying a sufficient connection that obligates the business to collect and remit sales tax. Nexus can be established through physical or economic presence.

Physical nexus is created when a business has a tangible presence in a state. Examples include having a physical store, office, or warehouse, maintaining inventory in a state, or having employees or sales representatives working within its borders. Even temporary activities, such as attending trade shows to make sales, can create physical nexus.

Economic nexus, established after the South Dakota v. Wayfair, Inc. Supreme Court decision, means a business must collect sales tax if it meets certain sales thresholds or transaction counts in a state, regardless of physical presence. These thresholds vary by state, but common examples include exceeding $100,000 or $500,000 in sales, or completing 200 or more transactions annually. Most states with sales tax have adopted economic nexus provisions.

Sales tax is applied to the retail sale of tangible personal property, though taxability of specific goods and services differs by state. Sales tax rates are determined by a combination of state, county, and city rates, resulting in varying total rates across different localities. Before collecting sales tax, a reseller must register with the state’s tax authority in each state where nexus is established.

Sales Tax Across State Lines

Operating as a reseller across state lines adds complexity for sales tax compliance. Businesses, particularly online resellers, must manage obligations in multiple jurisdictions where they have established nexus. The South Dakota v. Wayfair, Inc. ruling changed sales tax compliance for remote sellers by allowing states to require sales tax collection based on economic activity alone, even without a physical presence.

States use either origin-based or destination-based sales tax systems to determine the applicable tax rate. In origin-based states, the sales tax rate is based on the seller’s location, while in destination-based states, it is determined by the buyer’s location or point of delivery. Most states operate under a destination-based system, which requires remote sellers to apply the sales tax rate of the customer’s location.

Resellers purchasing inventory from suppliers in different states may need to obtain multiple resale certificates. While some states accept a uniform multi-state certificate, many require their own specific forms. Understanding and adhering to the diverse sales tax laws of each state where nexus is established ensures compliance and avoids penalties.