- Resale certificates help ecommerce sellers avoid sales tax on goods they intend to resell
- Obtaining and properly using resale certificates saves sellers money and ensures compliance with state sales tax laws
- RJM Tax Exemption offers comprehensive services to navigate all aspects of sales tax compliance
If you purchase goods from a supplier and then sell them to a customer, you are a reseller. Since many ecommerce businesses function in exactly this way, it’s important to understand resale certificates and tax exemption so you reap the benefits.
Obtaining and using resale certificates correctly can translate into substantial savings and a smoother tax compliance process. Let’s break down what resale certificates are, is having a resale certificate the same as being tax-exempt, and when ecommerce sellers can avoid paying, and collecting sales tax.
What Are Resale Certificates?
Resale certificates provide resellers with tax exemption on their purchases. They allow you to buy goods without paying sales tax, as long as those goods are intended for resale. In other words, as long as you are not the end-user of the goods, you aren’t required to pay sales tax when purchasing them.
With resale certificates, products aren’t taxed twice. If, for example, you buy wholesale clothing from a supplier, pay sales tax for your purchase, and then charge sales tax to customers who purchase the clothes from you, that would be double taxation on the same product. Using resale certificates when you buy items to resell ensures you only collect tax from the final customer, when required by sales tax nexus.
Is a Resale Certificate the Same as Tax-Exempt?
In the situation above, having a resale certificate is the same as being tax-exempt as far as making purchases is concerned. As noted, this form of tax exemption is for items intended for reselling to an end-user.
Other forms of tax exemption might apply to nonprofits, government agencies, or manufacturers who purchase raw materials. For instance, nonprofits like churches or charities often qualify for blanket sales tax exemptions on purchases for their organizations, with some exceptions. City, state, and federal government entities typically avoid paying sales tax, as well.
Manufacturers are often tax-exempt when buying components or raw materials used in production, as these goods aren’t the final item being sold. Each of these tax exemptions serves a different purpose from resale certificates and requires different documentation.
When Ecommerce Sellers Can Avoid Paying Sales Tax
Knowing when ecommerce sellers can avoid paying sales tax can lead to significant financial benefits. Here are some of the typical scenarios in which resale certificates can relieve you from sales tax and save you money:
1. Purchases From Wholesalers
A seller that doesn’t directly retail to the public is called a wholesaler. Many wholesalers accept resale certificates and therefore don’t collect sales tax on your purchase. That means when you buy items to turn around and sell to others, they are tax-free at the time you buy them.
2. Purchases From Other Retailers
Even if you purchase products from another retailer, if your intention is to resell them, then you can typically use resale certificates for tax exemption. Note that you may NOT use your resale certificates for items intended for your own use, either personally or in your business operations. This form of tax exemption is only for items that are for resale, and violating this can lead to fines and penalties. As an example:
- Buying auto parts to resell on your ecommerce platforms DOES qualify for tax exemption
- Buying auto parts to install on your own vehicle DOES NOT qualify for tax exemption
3. Purchasing Items Used in Making Your Products
While you may not be a manufacturer, per se, if you purchase items and incorporate them into the products you sell, you may use your resale certificates for tax exemption on those purchases. This could include products like yarn for knitted clothing, wood for furniture, paint for artwork, etc.
If you buy components from retailers for this purpose, be sure you:
- Present your resale certificates when making purchases
- Keep accurate records reflecting how the purchases were used
- Collect sales tax (when applicable) when you sell the finished products
4. Fulfilling Orders Via Dropshipping
If your supplier ships directly to your customer, you’ll typically avoid paying sales tax. As with most aspects of sales tax obligations, this can vary by state. It’s important to understand the applicable regulations when dropshipping is involved.
While other scenarios affect ecommerce sellers and sales tax, these are the most common ones you’ll likely encounter. Note that in all cases, valid resale certificates are required—you can’t simply identify yourself as a reseller and demand tax exemption.
Savings Scenarios
If obtaining resale certificates and benefiting from tax exemption seems too complicated to bother with, it’s worth taking a look at how they can impact your bottom line. As with maximizing tax deduction opportunities, your savings when using sales tax exemptions can really add up.
Purchasing goods without resale certificates from states with high sales tax rates, especially when they impose both state and local sales taxes, can be costly. In Louisiana, for example, where the combined sales tax rate can exceed 10%, you will pay $10,000 or more in sales tax for every $100,000 in goods you purchase.
Even with Colorado’s relatively low state-level rate of 2.9%, that’s a lot of money ($2,900 to be exact) to leave on the table. By using valid resale certificates on these purchases, all of that money stays with your business to go toward marketing, product development, or expansion. That’s a powerful incentive to secure tax exemption.
State-by-State Differences
Like most ecommerce taxation matters, the use of resale certificates and tax exemption privileges varies significantly by state. Some states allow the use of out-of-state certificates, while others do not. Some require annual certificate renewal, while others do not. At RJM, we stay on top of these tax exemption regulations and help clients remain compliant.
It’s also helpful to remember the distinction between whether a resale certificate is the same as tax-exempt, so you don’t risk noncompliance with specific state rules. Being confident of which applies in your scenario helps avoid costly mistakes.
Sales tax rates and which items are taxable also differ from state to state, and Oregon, Delaware, Montana, New Hampshire, and Alaska have ZERO sales tax. This variability makes it even more critical to understand how and where to use your resale certificates effectively.
What if My Customers Have Resale Certificates?
Your ecommerce sales tax collection and remittance may also be impacted by resale certificates. Whether you sell entirely to other businesses or it only occurs occasionally, if the purchaser intends to resell your product(s), their purchases may be tax-exempt if they hold resale certificates.
While ecommerce platforms typically manage the process in the event your buyer is tax-exempt, it’s important to consider this eventuality if you sell directly via your own website or over another platform that requires you to manage sales tax collection yourself.
It’s worth noting that accepting resale certificates can make you more attractive to buyers and increase your sales volume. So while it does add another layer to your accounting responsibilities, if competitors aren’t able to offer sales tax exemption, it can enhance your value proposition.
How to Get a Resale Certificate
To take advantage of resale certificates and tax exemption, you must be sure to register properly, keep accurate records, and complete timely filings. Each state you sell in and pursue ecommerce sales tax exemption in has different requirements, so working with a trusted team like RJM can streamline the process and ensure you’re handling everything accurately.
Final Thoughts
Understanding and using resale certificates and tax exemption effectively is one of the smartest ways for ecommerce sellers to save money while staying competitive and compliant with U.S. sales tax regulations. Without resale certificates, you’re paying more than you should. You could also face audits and penalties if you benefit from exemptions that haven’t been secured through proper certification.
Get Expert Help From RJM
RJM has helped countless ecommerce sellers avoid paying sales tax. We offer personalized support, quick turnaround time, and some of the best rates in the industry. From sales tax registration and filing to income tax preparation, we’ve got you covered.
If you’re ready to take the stress out of managing resale certificates and tax exemption, reach out to RJM for your FREE consultation today. We’ll simplify compliance and get you on the way to making the most of ecommerce sales tax exemption benefits.
