How to Use Resale Certificates in Your E-Commerce Business

Nobody wants to pay unnecessary taxes, especially not business owners who buy and sell products from vendors in other states. That’s why you need a resale certificate, or permit, to continue making money.

U.S.-based merchants aren’t required to pay out-of-pocket sales tax for the products they’re selling online or in-store. Instead, customers pay that tax when they make purchases. Businesses then collect the money and send it to the appropriate party on a predetermined schedule.

Sounds easy, right? Well, not so fast. There are lots of things to do before your company can legitimately operate on any e-commerce software solution. The most important step is filling out the appropriate applications for tax-exempt status.

Overview: What is a resale certificate?

The document used to prove you’re a legitimate e-commerce business or retailer is called a resale certificate. To use one and begin selling online, merchants must register to collect sales taxes in one or more U.S. states.

A reseller certificate is sometimes called a reseller permit or an exemption certificate. It’s basically the same thing as a sales tax permit or license. However, some sellers receive separate resale certificate numbers from their state.

Resale certificate vs. seller’s permit: What’s the difference?

Although many people get confused by this, resale certificates and seller’s permits are not the same thing.

A seller’s permit allows retailers to sell products and legally collect state sales taxes. So while a resale certificate is required when buying goods, a seller’s permit is required when selling them.

Which states require you to have a resale certificate?

Most vendors can accept out-of-state resale certificates but not all. Understanding this can help your e-commerce strategy because it dictates where to buy and sell.

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For instance, say a business is registered to collect sales tax in California. You then purchase products for resale from a Nevada reseller. In that case, Nevada tax law lets the vendor accept California-issued resale certificates.

On the other hand, a vendor from Nevada couldn’t make the same type of purchase in California because that state doesn’t permit out-of-state retailer or wholesaler permits.

For that reason, it’s important to know which states require you to have a resale certificate. These are the nine states — plus the District of Columbia — that won’t accept out-of-state permits:

  • Alabama
  • California
  • Florida
  • Hawaii
  • Illinois
  • Louisiana
  • Maryland
  • Massachusetts
  • Washington
  • Washington, D.C.

To make purchases for resale in any of those places, you have to register for a sales tax permit and then collect revenue from all buyers in that state, or in D.C.

Vendors reserve the right of refusal, which means you may end up paying sales tax on items you sell. If that happens, recoup the money by filing an updated sales tax return.

How to get a resale certificate for your online shop

When starting an online store, getting a resale license isn’t as tricky as it sounds. Finding out where to go and which resale forms to fill out is usually the most challenging part.

To get started, visit the Department of Taxation and Finance for the state in which you conduct business. Forms and documents are available online and can be printed immediately.

Resale permit applications are easy to fill out as long as you have all the required information ready to go. However, government paperwork can be overwhelming when you’re just getting started. Here’s a step-by-step breakdown of the process.

1. Find out which states require a reseller’s permit

Understand that small businesses without commerce in other states only need a reseller’s permit for their home state. Sellers who conduct business in other states need to apply for “nexus” permits in each state where their goods or services are sold.

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You’ll start getting regular statements once you receive a sales tax ID. Some states use your federal Employer Identification Number (EIN), while others issue a separate tax-exempt number.

Take a look at this map for detailed information about the reseller permit requirements in each state.

2. Prepare your documents for the application process

You’ll be asked to provide a lot of personal information during the application process, so come prepared. Typically, you’ll need the following items:

  • Full legal name
  • Social security number (SSN)
  • Date of birth (DOB)
  • Driver’s license number (DLN)
  • Business bank account numbers
  • Supplier names and locations
  • Projected monthly sales

You may also be asked to provide details about the structure of your business. Specific ownership data might be collected as well.

Limited liability companies (LLCs) are commonly required to list their incorporation date, their corporation number, and their EIN. And if you apply from somewhere outside the U.S., some states may ask for personal references.

3. Fill out the application

Completing the lengthy application isn’t difficult; it’s just time-consuming. Fortunately, you can request a paper form or complete the questionnaire online.

Keep in mind that you may have to pay a small fee to submit your application once it’s done. So only apply for a reseller’s permit in the states where you plan to do business.

Before applying, get in touch with your county clerk or another relevant local authority for more information on current application filing requirements.

4. Calculate the state sales tax rate

While waiting for your application to process, begin calculating the sales tax rate in each state where you plan to conduct business.

Calculating sales tax is one of the most important steps for successfully marketing your shop because it gives business owners an idea of which zones to target. Keep in mind that some states allow non-standard sales tax rates for specific items such as lodging, meals, and telecommunications.

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And remember, sales and use tax rates change monthly. Talk to your business tax advisor for more information about specific questions. Then visit your state’s revenue department for relevant materials and resources.

5. Begin selling online

You don’t have to wait too long for your application to go through as long as you’ve accurately entered all the necessary information. Just be sure to keep your certificate on file for later verification if needed.

Most states require you to retain records for at least five years. If you can’t produce one when requested, your online shop may be stopped from buying and selling goods or charged outrageous fees.

Without a legitimate permit, you’ll pay sales tax for the items you buy wholesale and then pay a tax again when the item sells. You can always add those figures as a deduction on your annual return, but that’s far more complicated than just presenting a license.

DID YOU KNOW? Fraudulently using a resale certificate can result in stiff penalties, including, but not limited to taxes due, interest, permit cancellation, fraud or evasion penalty of 25%.

The takeaway

Running a small business is a lot of work. Aside from buying and selling, there are tons of forms to fill out and mountains of applications to submit. You also need to keep immaculate records.

Fortunately, applying for a resale certificate isn’t hard at all. As long as you understand the process and gather the required information, you should be able to launch and support an online store with ease.

Keep in mind that most wholesalers require a copy of your sales tax ID, EIN, or reseller’s permit before they’ll sell you anything. That’s because they’re legally obligated to ask for it, so be ready.

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