Reseller's Sales Tax on Sales

April 13, 2006

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The following are some questions that commonly arise in regard to sales taxes for resellers, when they sell goods.

When will I become responsible for paying sales or use taxes to the state? To answer this question, you're going to have to first figure out whether your business will be treated as being "physically present" within a state. If you think that you're going to have physical 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.

The type of exemption that you're most likely to see is a resale exemption. Resale exemptions, which are usually in the form of a resale certificate, allow your customer to acquire property tax-free if it will later be resold. The resale certificate may be in a specific form provided by the state, or it may simply be a document which 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.

What is a "blanket" resale certificate and when should I accept one from a customer? 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 maintain a current file of valid resale certificates. We recommend that you check the rules for your particular state.

When you are harvesting resale certificates from your customers, your primary concern is making sure that you 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.

As a cookware wholesale reseller, you accepted a valid blanket resale certificate in good faith from your customer, Oak Department Store. When Oak makes a $5,000 purchase of cookware the entire amount of the sale is tax-free. If you add a $200 additional charge to the purchase price for delivery of the shipment, this amount will also be non-taxable.

If I accept trade-ins, can I reduce the taxable amount of resale property by the value of a trade-in? If you allow your customers to offset the purchase price of new equipment by the value of old equipment ("trade-ins"), some states will let you offset the amount subject to sales tax by the value of the customers' trade-in. However, each of these states may have a different idea of what an allowable trade-in is.

In Colorado, you can reduce the gross sales price of new equipment by the value of any trade-in when calculating the amount subject to sales taxes as long as the traded-in property will be sold at retail. This means that, in theory, if your sold a customer a car, you could still get the reduction even if you took a tractor as a trade-in.

In a state such as Illinois, though, you can only reduce the sales price if the trade-in itself is similar to that which your customer is purchasing. So, if you're selling cars, your customer is going to have to trade in a car rather than a tractor to get this reduction.

Finally, there are states like Michigan which do not allow any trade-in deduction from the purchase amount subject to sales tax. So, 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.