5 Things You Need to Know About Resale Certificates

By Tom WeissMarch 31, 2020

Whenever you are selling goods and services to a reseller, you have likely faced questions about accepting resale certificates.

Many wholesalers shy away from accepting resale certificates due to the complexity of validating the right tax forms, from the right source for the right purpose. In addition, such forms need to be correctly filled out and certain forms even need added verification steps. It’s a pretty daunting task if you are new to resale certificates or solely rely on Google as your most trusted tax adviser (which is a very bad idea!).

While it is true that accepting resale certificates do come with added responsibilities and liabilities for the seller, the advantages of supporting and accepting resale certificates can significantly outweigh the risks.

The below is a good starting point to get your feet wet on Resale Certificates.

1. Resale certificates are governed at the state level

Each state dictates their own variation of rules and regulations when it comes to deeming a certificate valid or invalid. Make sure that you are aware of all rules and regulations on state level for each form you are accepting – again, don’t use Google as your adviser to process and validate your resale certificates, but instead use a software platform to help you determine whether forms are good or bad for specific periods of time and purposes.

2. Resale certificates can only be used for a valid purpose

Only accept resale certificates from your buyer which fit the logical purpose of the goods or services you are selling to them. In other words, don’t accept a resale certificate from your buyer if the purpose is not logical to the item you are selling (for example: swimming pool equipment will likely not be used to assemble an airplane). Use common sense and think about how an auditor would react if he or she has to determine the right purpose. If in doubt, reject the resale certificate and ask the buyer to provide a new one, that fits the purpose and satisfies your needs.

3. Always verify your resale certificate

In many states, if you as the seller accept and initiate a tax-free sale to a buyer who presented you with an expired or otherwise invalid resale certificate, then you are on the hook to pay the sales tax if things go wrong. This is the liability you need to be aware of when accepting resale certificates. Always ensure that your buyer’s resale certificate is not fraudulent, expired or otherwise faulty. Make sure you understand how to validate and verify your resale certificates. When in doubt, get back to your buyer and ask for more details and a corrected resale certificate. Again, it is strongly recommended not to guess your way through this process. The risk of back taxes, penalties, and interest you may accrue due to mistakes in this area can likely outweigh the trivial cost savings you may achieve by not utilizing a proper exemption management platform.

4. Nine states (plus Washington, D.C.) don’t accept out-of-state resale certificates

Most states across the US allow out-of-state resale certificate to make purchases tax free for resale. However, these nine states (plus D.C.) do not:

  1. Alabama
  2. California
  3. Florida
  4. Hawaii
  5. Illinois
  6. Louisiana
  7. Maryland
  8. Massachusetts
  9. Washington
  10. Washington D.C.

Be aware of this rule and reject resale certificates if they are not correctly applied. In order to take advantage of the resale exemptions in these states, you will need to register to collect sales tax in these states.

5. You can choose to accept a resale certificate

You are in full control and have the right to accept or reject any and all resale certificates which are presented to you. Do not get bullied into accepting forms as some buyers may press you to do so.

Even big retailers, such as Target, are notorious for refusing to accept resale certificates. Remember, you are likely on the hook for back taxes, penalties and fines if you do accept an invalid resale certificate. Stay on the safe side, apply common sense, and seek help to ensure that your resale certificates will pass an audit.

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

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Sales tax rules and regulations change frequently. Although we hope you'll find this information helpful and informative, this blog is for informational purposes only and does not provide legal or tax advice.