Resellers, such as department stores, grocery stores, automobile dealers, catalog, and some e-commerce sellers, are in the business of buying goods and reselling the same goods.
Resellers purchase items and then sell those items substantially unchanged. Generally, resellers do not pay sales tax when they purchase the items but must collect sales tax when those items are sold to the end user.
While the products sold by resale businesses may be very different, they all buy products and then resell them in the same form in which they were acquired. For example, if you buy wheels from a wholesaler and then turn around and sell these same wheels, you are a reseller because there is no difference between what you bought and what you sold. However, if you buy these wheels and then attach them to wheelbarrows, you'll probably be treated as a manufacturer rather than a reseller because the wheels you bought are an entirely different product as a component of the wheelbarrow.
Resellers are liable for collecting and remitting sales taxes for items that they sell in a state if the business is "physically present" within a state. E-commerce sellers are liable if they have an “economic presence” in the state – which is generally determined based on the amount of sales or transactions in the state. If you think that you're going to have physical or economic presence within a state, then you'll have to collect taxes on sales in the state unless some type of exemption from sales tax applies to the transaction. If you aren’t sure, you may want to consult with a sales tax expert. Compliance with the sales tax laws and rules can be particularly complex if you are selling in multiple states or if you are an online seller using a marketplace facilitator to sell your products.
Resale certificates exempt buyers of goods that will be resold, from paying sales tax
The type of sales tax exemption that you're most likely to see as a reseller takes the form of a resale certificate. Your customers who have a resale certificate can acquire property without having to pay the sales tax if the property will later be resold, on the assumption the end purchaser will pay the sales tax. The resale certificate that your customer has may be in a specific form provided by the state, or it may simply be a document that includes some basic information requirements provided in the state law. In either case, it's a very good idea for you to adopt a policy of obtaining a copy of the customer's resale certificate in order to give the resale exemption to a customer. When the state auditor comes knocking on your door and wants to see support for your claimed resale exemptions, a certificate goes a long way toward meeting this support requirement.
"Blanket" resale certificates speed up the process for repeat customers.
A wholesaler usually sells products to other businesses rather than end users. If you're a wholesale reseller, then hopefully you deal with many business customers that continuously make exempt resale purchases. In order to speed up the purchasing process for these types of customers, many state laws let purchasers use "blanket" resale certificates for purchases from their vendor. A blanket resale certificate is a resale certificate that you will keep on file, which allows your steady customers to make multiple exempt purchases. You'll find that most states allow for blanket resale certificates, but the states have various requirements for collecting ("harvesting") and maintaining a current file of valid resale certificates. We recommend that you check the rules for your particular state or obtain the advice of a sales tax expert.
When you are harvesting resale certificates from your customers, you must maintain a file of properly completed and valid resale certificates that were accepted in good faith. Once you are satisfied that all the requirements for accepting a resale certificate have been met, you can apply a resale exemption to your customer's resale order as well as including any freight charges for shipment.
States vary on the impact of trade-ins
If you allow your customers to offset the purchase price of new property or equipment by the value of old property or equipment ("trade-ins"), some states will let you offset the amount subject to sales tax by the value of the customers' trade-in. In general, the sales tax will be due on the reduced price only if you plan on reselling the trade-in. However, each of these states may have a different idea of what an allowable trade-in is. For example, in some states you can reduce the sales price only if the property you accepted as a trade-in is of the same type as the property sold, while in other states any trade-in is acceptable. There are states that don’t allow reductions in sales tax for trade-ins at all, while others accept it only for certain kinds of property – like vehicles.
If you take trade-ins as part of your business, you should contact your state's taxing authority in order to find out what their requirements are for reducing the sales amount by the value of a trade-in or obtain the advice of a sales tax expert. (Looking to do business internationally? See our article on differences between VAT and sales tax.)
Internal consumption of inventory triggers tax liability
So far we have discussed the sales tax liability of resellers when you sell your inventory. However, when you purchase inventory using your own resale certificate, you agree to be responsible for paying and/or collecting sales or use taxes when the property is resold. Accordingly, if you or your business consumes inventory internally, states treat the internally consumed property as if it was sold. You will be treated as the consumer and be required to pay sales tax on the value of the property.
Inventory used for demonstration.
If your business uses a piece of inventory property for display or demonstration purposes ("demos"), no sales or use tax will be incurred. However, if you later sell or donate this property to charity, you may be hit with sales or use taxes even if the sales price is discounted. If so, the question that you are probably asking yourself is, what is the sales amount I'm supposed to pay tax on? First, if the property is donated to charity, then its value for tax purposes should be what your business paid for it when it was put into inventory. Alternatively, if you can sell the demo property, then you should pay tax on the amount you would normally charge, less any discount you gave your customer for buying a "floor model." However, to be sure you should obtain the advice of a sales tax expert.
Conclusion
If you are a reseller, you need to be aware of the sales tax laws that apply to you as both a buyer of goods and a seller of goods. A lack of awareness could result in you or your business paying sales taxes when not required to or being liable for failing to collect and remit sales taxes when required to. Sales tax laws are complex and vary by state. You may want to obtain the advice of a sales tax expert to make sure you and your business are compliant.
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