If you’re opening an online or brick-and-mortar retail store, you need a resale certificate. What is a resale certificate? If you’re making products, a resale certificate, also called a resale tax certificate, will help you to buy the parts and basic materials you need to make them without paying sales tax. If you’re buying wholesale products and reselling them, the resale certificate also enables you to buy wholesale without paying sales tax. Your state tax authority issues your resale certificate. Depending on how and where you’re selling, you could need a similar resale certificate from other states that you also do business in.Table of Contents:
- What information is needed to get a Resale Certificate?
- Understanding “Sales Tax Nexus”
- Which tax rates should be charged?
- How to Get a Resale Certificate
- Resale Certificate FAQs
What information is needed to get a Resale Certificate?
Resale tax certificates can also be called a reseller license, resale tax certificate, reseller permit, or sales tax exempt certificate. The terms vary by state. Having a resale certificate means you’re responsible to collect sales tax from customers when you make a sale. You’re also responsible to send the sales tax to the state. At the minimum, you need to register your business each year with your state to keep your resale certificate in good standing. The certificate will require:
- Your name
- Your business name
- State registration number
- Federal tax ID (EIN or SSN)
- Business address
- Contact information (phone, Email)
- A signature that verifies your identity
When you’re working with a wholesale business, you’ll see immediately that they will ask for your resale certificate before you can set up your account with them.
Understanding “Sales Tax Nexus”
You’ll hear the term “sales tax nexus,” but how does this apply to your retail business? If you’re a locally-owned and operated store and you only do point-of-sale transactions in your state, then your sales tax nexus is your state. Simple, right? However, if you have any sales in other states, it’s important to understand the basics of where you need to collect and send sales tax: the sales tax nexus. Understanding the sales tax nexus for your customers and sales is especially important for online sellers.
Some sales tax nexus laws are simple and straightforward. Others are more complicated. Here are the categories that could create a sales tax nexus, meaning you need to account for your sales tax in those states and send the tax you collect to them:
- Economic activity
- Physical presence
- Remote employees
- Click-through nexus (including referral networks)
- Affiliate sales
- Advertising and drop shipping
Which tax rates should be charged?
Sales tax is paid by the customer. Your responsibility as a retail business is charging the appropriate amount and sending it to the state tax authority. However, this part of your responsibilities isn’t as simple as it sounds. Different states charge sales tax based on two different formulas: origin-based sales tax, and destination-based sales tax. Your sales tax nexus (which state you’re doing business in) will determine the type of tax you need to send for each transaction.
Origin-Based Sales Tax
If you’re selling in an origin-based sales tax state, you will collect and send sales tax based on the location of the sale. So, for example, if your office is located in Pennsylvania, you will collect sales tax based on Pennsylvania’s tax rate. You will send the tax to Pennsylvania’s taxing authority.
Destination-based Sales Tax
If you have a sales tax nexus in a destination-based state, you will collect and send sales taxes based on the location of the buyer. So, if you go to a trade show in Indiana, you are responsible to collect and send the taxes based on the location of those sales. That sounds simple, but online sellers who sell to many locations will be responsible to collect and send sales taxes based on where they ship the items that they sell. There are more destination-based sales tax states than origin-based states.
Nexus and Online Retailers
The sales tax nexus and different state tax rules are especially important for online and e-commerce businesses. States were understandably concerned that sales were happening in their borders but they weren’t receiving sales tax from them. As a result, sales tax nexus laws have set forth the responsibilities for out-of-state online sellers to collect and send sales tax for any item they sell and ship to those states through their online store.
How to Get a Resale Certificate
Before you proceed with getting the resale tax certificate or certificates you need, you must determine which states you’ll need one from. If you’re a local store that doesn’t ship out of state, then you’ll only need a resale certificate from your own state. If you’re an online seller, you can get help from your online marketplace. Marketplaces like Amazon (and others) maintain contact lists for every state where sellers sell and ship items. Don’t neglect the information you’ve learned about sales tax nexus. It will influence which state you’ll need a resale certificate in, and what your responsibilities are in collecting and sending sales tax.
Once you know the states where you need a reseller permit or certificate, then you can start applying for them.
- Get your state’s application form – You can apply online in most cases. It’s free to apply for a resale certificate in most states, but a few charge a small fee.
- Get your required documents together – It’s smart to keep your corporate documents altogether. You can keep them in a secure online folder or in a paper folder. These are some of the basic documents you’ll need when completing applications:
- IRS EIN Number
- Articles of Incorporation or Organization
- Driver’s License or Verified Real ID
- Bank Information
- Names and Addresses of Suppliers/Vendors
- Estimated Sales Revenue
- Complete the form, upload or submit documents, and if necessary, pay the fee.
- Find out if you will need to renew the permit – Some states allow you to use the permit without renewal. Others require regular renewals each year or every few years.
Resale Certificate Frequently Asked Questions (FAQs)
Is a resale certificate the same as a tax-exempt certificate?
Generally these terms are referring to a document or permit that has the same effect: They allow a retailer to avoid paying sales tax on purchasing goods or materials that will later be resold or will be used in a product that will be sold later on. These prevent a retailer from both paying sales tax on the initial purchase as well as remitting sales tax on their final sale.
What is the difference between a seller’s permit and a resale certificate?
A seller’s permit allows you to sell items for retail (to an end customer) or wholesale (to someone who will resell the items). A resale tax certificate allows you to buy wholesale goods and not pay sales tax. It also certifies you to sell items for retail in a specific state, but you will also be required to send the sales tax you collect to the state.