3 Common Mistakes To Avoid When Accepting Resale Certificates

If you’re business owner that buys and resells goods and services for resale, you know that rules for managing resale certificates can be variable and complex. Despite the pains of resale certificate compliance, resale certificates provide many businesses an avenue to avoid double taxation and maintain a cash flow advantage. By avoiding the 3 common resale certificate pitfalls listed below, businesses can significantly reduce the risk of resale certificate deficiencies during a sales tax audit.

1. A copy of the Purchaser’s Sellers’s Permit may not always substitute as a Resale Certificate.

While certain states do allow a copy of the seller’s permit to be used to document an exempt transaction, this is not always the case. A copy of a seller’s permit may show that a party is engaged in business in a certain state, but it does not necessarily shift tax liabilities to the purchaser. If you want to mitigate the risk of a sales tax auditor hitting the jackpot by discovering this deficiency, it’s very important to be aware of the specific requirements needed to substantiate a tax-exempt resale transaction in each state, including having timely (We’ll explain timely later) and valid resale certificates to maintain compliance.  

2. A valid Resale Certificate can have many specific requirements. 

Now that you know that a resale certificate may be needed, you may ask what constitutes a valid resale certificate? While requirements vary by state and purpose, generally most resale certificates require certain information to be included for it to be considered valid. This includes but is not limited to names and addresses of purchasers and sellers, description of goods or services being sold, the nature of the transaction, dates, declarations signed under the penalty of perjury, and external verification with states.

In addition to having all the required information, for a resale certificate to be considered valid it may also need to meet good faith standards. While requirements vary by state, this can involve refusal to accept resale certificates with logical inconsistencies. For example, if the purchaser is claiming to be a Liquor Store, it’s very unlikely that they will be purchasing rocket engines for resale in the ordinary course of businesses. Before accepting such declarations at face value, ask yourself what an auditor would say about such a potential inconsistency. Additionally, if the purchaser provides a seller’s permit number on the document which is fake or can’t be verified in the applicable jurisdiction, (Rules for verification vary by state) tax liability may also shift back to the seller.

3. Resale certificates must be collected and renewed in a timely manner.

In a sales tax audit it may not be enough for a business to just have a resale certificate for its customer, the resale certificate itself must also be collected in a timely manner. While thresholds for being “timely” vary by each state, many states mandate that a resale certificate is collected prior to delivery of goods and services, within the seller’s normal billing cycle or within 90 days of the sale. This means that in most cases you won’t be able to shrug of the responsibility to collect resale certificates until after you get audited. If you haven’t been collecting resale certificates at all, an auditor may see your lack of timely collection as another jackpot opportunity. Furthermore, even in situations with potential for leniency and extra time to collect certificates, you may run into situations where it may be impossible to obtain a resale certificate (A business may be non-responsive or be bankrupt). Through timely collection, this is an entirely preventable situation.

In addition to collecting resale certificates in a timely manner, it’s also important to note that certain resale certificates can expire and may need to be renewed on a periodic basis. Thus, the process of collecting and validating resale certificates may not be a one off and may be a recurring process. Like most things sales tax related, validity and expiration periods can differ by state and purpose.    

The best way to minimize your tax obligation and audit exposure is to ensure you collect and validate all of your tax exemption certificates accurately and renew them on time with strong internal processes and end-to-end resale and tax exemption management platform. Consider partnering up with a tax service provider who fits your business needs in terms of usability, cost and commitment. 

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