Resale certificates are a very important part of the state and local sales tax process. As a business, if you sell to another business who intends to resell your product, you must have a resale certificate on file. Not having the correct certificates on file can land your business in hot water.
Updating Resale Certificates
For a company to purchase items that they plan to resell, they need to provide a resale certificate. Since the company is reselling, they are not the consumer or end user of the product, therefore, they should not pay sales tax. Many states require the resale certificate to be updated over a certain period of time in order to remain valid. In Illinois, the resale certificate should be updated every three years. Not having an updated resale certificate on file can result in the company being charged sales tax, even if they are not the end user states’ of the product.
Resale Certificates and Audit
If you collect resale certificates from customers for resale, the most important reason to be sure an updated resale certificate is on file is because of sales tax audits. An auditor will request resale or exemption certificates if they notice that no sales tax was charged to your customer. If the resale certificate is not on file, the business may be liable to pay the uncharged sales tax. This can be a costly mistake.
Additionally, it is important to note that every state has different forms for resale certificates. If you happen to be in multiple states, you will need to be sure to collect the correct state’s resale certificate. Very few states accept other state’s resale certificates for a sale.
South Dakota v. Wayfair and Resale Certificates
Resale certificates are increasingly important, especially after the South Dakota v Wayfair ruling, and many states are passing economic sales tax nexus laws. A company’s gross revenue in a state may exceed the new nexus thresholds, but they may only sell items for resale purposes. The company may have to register in the state but collect the proper resale certificates from customers in that state.
How DHJJ Can Help
If you have further questions on resale certificates and sales tax, please contact your tax advisor or a member of the DHJJ State and Local Tax (SALT) Group at 630-420-1360.
