Understanding Sales Tax in the Reselling Industries
Resellers, such as department stores, grocery stores, automobile dealers, and catalog sellers, are in the business of buying goods and reselling the same goods. Resellers purchase items and then sell those items substantially unchanged. Generally, resellers to do pay sales tax when they purchase the items, but must collect sales tax when those items are sold to the end user.
While the products sold by resale businesses may be very different, they all buy products and then resell them in the same form in which they were acquired. For example, if you buy wheels from a wholesaler and then turn around and sell these same wheels, you are a reseller because there is no difference between what you bought and what you sold. However, if you buy these wheels and then attach them to wheelbarrows, you'll probably be treated as a manufacturer rather than a reseller because the wheels you bought are an entirely different product as a component of the wheelbarrow.
Resellers are liable for sales taxes for items that they sell in a state if the business is "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.
"Blanket" resale certificates speed up process for repeat customers. 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, you must 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.
Business Entity Compliance from CT Corporation — Partner with the Industry Leader
Contact your CT service representative now!
States Vary on the Impact of Trade-ins
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 you sold a customer a car, you could still get the reduction even if you took a tractor as a trade-in.
However, in Illinois, you can only reduce the sales price if the trade-in is similar to the property purchased So, if you're selling cars, your customer is going to have to trade in a car, not a tractor, to get this reduction.
Many states, such as Michigan, do not allow any trade-in deduction from the purchase amount subject to sales tax (although many of these states make exceptions for vehicles.) 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.
Internal Consumption of Inventory Triggers Tax Liability
When you purchase inventory using a resale certificate, you agree to be responsible for paying and/or collecting sales or use taxes when the property is resold. Accordingly, if you or your business consumes inventory internally, states treat the internally consumed property as if it was sold. You will be treated as the consumer and be required to pay sales tax on the value of the property.
Inventory used for demonstration. If your business uses a piece of inventory property for display or demonstration purposes ("demos"), no sales or use tax will be incurred. However, if you later sell or donate this property to charity, you will almost certainly be hit with sales or use taxes even if the sales price is discounted. Now, the question that you are probably asking yourself is, what is the sales amount I'm suppose to pay tax on? First, if the property is donated to charity, then its value for tax purposes should be what your business paid for it when it was put into inventory. Alternatively, if you are able to sell the demo property, then you should pay tax on the amount you would normally charge, less any discount you gave your customer for buying a "floor model."
As a cookware reseller, you use your 20-piece cookware to product demonstrations at your "cookware parties." After three months of dozens of demonstrations, you decide to donate the cookware to the local soup kitchen. At that time, you will be required to pay use tax on the value of the property when you bought the property.
On the other hand, if you sell the demo cook ware to an interested customer at the cooking demonstration, then the value of the cook ware for tax purposes should be the normal sales price less any discount for buying the cook ware "used."