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 on reselling 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 be updated over a certain period 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 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 vs. Wayfair and resale certificates
Resale certificates are especially important to be aware of now that South Dakota vs. Wayfair has been ruled on (States are allowed to collect sales tax without a company having physical presence in the state). 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. Physical presence is no longer the minimum requirement to determine state taxability. Economic nexus, among others, is the new standard for determining business reporting requirements. State and local tax laws are consistently changing.
If you have questions about how the South Dakota vs. Wayfair ruling affects your business, contact the DHJJ State and Local Tax Group.
• Meaghan Wingbermuehle, CPA, is senior manager for DHJJ Certified Public Accountants and Business Advisors in Naperville.