Editorial · August 8, 2019
Resale Certificate: How Sales Tax Exemptions Work
A resale certificate is a signed form that lets a business buy goods without paying sales tax, because it will sell those goods to someone else. The buyer hands the form to the vendor. The vendor keeps it on file. That one piece of paper is what lets the vendor skip the tax on the sale.
What the form does
Sales tax is meant to be paid once, by the final customer. A shop that buys a pallet of shirts to resell is not the final customer. The shop's customers are. So the shop gives its supplier a certificate, and the tax is collected later, at the register.
The Multistate Tax Commission (MTC) is a group of state tax agencies. It publishes a Uniform Sales and Use Tax Certificate. Its page says 38 states have indicated the form is acceptable as a "blanket" resale certificate and for similar uses. The form was last revised on March 13, 2019.
The MTC says the form is used as support that the seller should not collect sales tax, because the item sold, or the buyer, is exempt from the tax.
How a buyer fills it out
The person filling out the form is the buyer. The first two lines name the seller and the seller's address. The rest describes the buyer: its name, its address, its type of business, and what it plans to buy.
Next to each state abbreviation, the buyer writes that state's ID number. States use different names for it. It may be called a state registration, a seller's permit, or simply an ID number. It is usually tied to the right to collect and pay sales tax.
The buyer also signs the form. The signer swears, under penalties of perjury, that the facts on it are true. The form says it is valid until the buyer cancels it in writing or the city or state revokes it.
What a seller must check
The seller carries the risk. Without a proper certificate on file, the seller is generally obliged to collect the tax for the state where the goods are delivered.
Most states use a "good faith" test. The MTC warns that the seller must take care that the item is the kind normally sold wholesale, resold, rented, or used as a part of a product the buyer makes and then sells. A seller who fails to take that care could be held liable for the tax in some states.
Think of a bakery that buys flour and says it is for resale. That fits. Now think of the same bakery claiming a resale exemption on a new office chair. That does not fit, and a careful seller would ask questions.
The MTC also says the seller decides whether to accept the form, usually by that good faith standard, and the state decides whether it proves the tax was properly skipped. The MTC itself does not decide.
Rules differ from state to state
The form comes with notes for each state, and they matter. A few examples from the March 2019 version:
- California: the form works only as a resale certificate, not as a general exemption certificate. The state refers to its Regulation 1668.
- Illinois: the seller must confirm a valid Illinois registration or resale number at the time of purchase. Good faith is not the test there, and no other state's number is accepted.
- Florida: the selling dealer must also get a resale authorization number from the Florida Department of Revenue.
- Colorado, Hawaii, Illinois, and New Mexico: the form cannot be used to buy a taxable service for resale.
The MTC states plainly that it cannot guarantee any state will accept the form, and that states may change their policies without telling it. Check with the revenue department of the state involved.
Keeping records
Once a seller accepts a certificate in good faith, the seller keeps it on file as state law requires. The MTC says the state that matters is generally where the seller is located or where the sale took place.
Many states let the form work as a blanket certificate. That means one form can cover many orders between the same buyer and seller. Some states want a fresh one now and then. Illinois, for one, says blanket certificates should be updated at least every three years.
A drop shipper needs extra care. If a supplier ships straight to the reseller's customer, the reseller may be able to use the form. But the supplier may refuse it if the reseller is not registered to collect sales tax where that customer lives.
A few habits help every business. Collect a certificate before the first sale, not after a problem. Check that every blank is filled in and the form is signed. Keep a copy where you can find it. Ask for a new one when your buyer's details change.
Sources
- Multistate Tax Commission, Uniform Sales and Use Tax Exemption Certificate (archived June 17, 2019)
- Multistate Tax Commission, FAQ on the Uniform Sales and Use Tax Certificate (archived June 13, 2019)
- Multistate Tax Commission, Uniform Sales and Use Tax Exemption/Resale Certificate, revised March 13, 2019 (PDF, archived May 18, 2019)
This is general information only. For how resale certificates work in your state, ask that state's revenue department or a sales tax professional.