Do Resellers Pay Sales Tax? How It Works

Sales tax is a fundamental component of commerce in the United States, applied at the state and local levels rather than federally. It functions as an indirect tax, meaning sellers collect it from consumers at the point of sale and then remit these funds to government authorities. The revenue generated from sales tax is a significant source of funding for public services, including education, infrastructure, and emergency response systems.

The application of sales tax varies considerably across jurisdictions, with each state determining its own rates and the specific goods and services subject to taxation. While most tangible personal property is taxable, exemptions often exist for essential items such as groceries and prescription medications. This intricate system means businesses must understand their obligations to ensure compliance with diverse state and local regulations.

Purchasing Items for Resale

Businesses that purchase goods with the intention of reselling them are exempt from paying sales tax on those purchases. This exemption exists because sales tax is ultimately intended to be paid by the final consumer of a product, not by intermediaries in the supply chain. Requiring resellers to pay sales tax on inventory would result in double taxation, where the same item is taxed first when purchased by the reseller and again when sold to the end customer.

To facilitate this exemption, resellers use a document known as a resale certificate, also referred to as a reseller permit or exemption certificate. This certificate serves as proof to suppliers that the items being purchased are for resale and are therefore exempt from sales tax at that transaction point. Presenting a valid resale certificate allows the reseller to acquire inventory without incurring sales tax, improving cash flow and avoiding unnecessary upfront costs.

Obtaining a resale certificate usually involves registering the business with the state’s tax authority. After registration, the state may issue a specific resale certificate or provide a template for the reseller to complete. Some states accept a multi-state certificate, such as the Multistate Tax Commission’s Uniform Sales & Use Tax Certificate – Multijurisdiction Form, which simplifies the process for businesses operating across several states. A resale certificate only applies to items purchased for resale; it cannot be used for items the business will use or consume, such as office supplies or equipment.

When making a purchase, the reseller provides the supplier with their valid resale certificate. The certificate includes information such as:
The purchaser’s name and address
The seller’s name and address
The purchaser’s registration number
A description of the property being purchased for resale
A statement confirming the intent to resell

Suppliers are required to keep these certificates on file to justify not collecting sales tax on the transaction.

Collecting Sales Tax from Customers

Once a reseller sells items to an end consumer, the obligation shifts to the reseller to collect sales tax on that transaction. This collection responsibility is triggered when the reseller establishes a sufficient connection, or “nexus,” with a particular state. Nexus signifies a level of presence or activity within a state that obligates a business to comply with its sales tax laws.

There are various types of nexus, with physical nexus and economic nexus being the most common. Physical nexus is established when a business has a tangible presence in a state, such as a physical store, an office, a warehouse, or employees working within the state. This also extends to inventory stored in third-party fulfillment centers.

Economic nexus means a business has a sales tax obligation in a state based on its economic activity, regardless of a physical presence. This is triggered when a remote seller meets certain thresholds for sales revenue or transaction volume within a state. Common thresholds include $100,000 in sales or 200 separate transactions within a 12-month period. Once a reseller meets these thresholds, they are required to register and collect sales tax in that state.

Beyond determining nexus, resellers must also understand which goods and services are taxable in the states where they have a collection obligation. While most tangible goods are taxable, the taxability of services varies significantly by state. States also employ different sales tax sourcing rules, with most being destination-based, meaning the tax rate is determined by where the item is delivered or the service is performed.

Submitting Collected Sales Tax

After collecting sales tax from customers, resellers have a responsibility to remit these funds to the appropriate state tax authorities. Businesses must register with the state’s tax authority in each state where they have established nexus. It is important to complete this registration promptly, as collecting sales tax without being properly registered is prohibited.

Sales tax returns must be filed regularly, with the filing frequency determined by the state based on the business’s sales volume or tax liability. Common filing frequencies include monthly, quarterly, semi-annually, or annually. Each state sets its own specific due dates, but many require returns to be filed by the 20th day of the month following the close of the reporting period.

Remitting the collected sales tax can be done through online portals, electronic funds transfers, or by mail. The sales tax collected by a reseller is not considered income for the business; rather, it is held in trust for the state government. Therefore, these funds must be remitted accurately and on time to avoid penalties and interest charges. Maintaining detailed and accurate records of all sales, sales tax collected, and remittances made is important for compliance and in the event of an audit.