Resale Certificates Explained: How to Buy Inventory Tax-Free

What Is a Resale Certificate?

A resale certificate is a sales tax exemption document that lets you purchase goods for resale without paying sales tax on that purchase. New York, for example, describes its Form ST-120 Resale Certificate as "a sales tax exemption certificate" (NY DTF).

The logic: sales tax falls on the buyer who uses the goods, not on the business buying stock to sell. California puts it plainly: "A sale for resale is not subject to sales tax. A person who purchases property for resale and who subsequently uses the property owes tax on that use" (CDTFA Regulation 1668), and Texas says a sale for resale "is not taxable" (34 Tex. Admin. Code § 3.285). When you resell the product, the tax is collected from your customer instead, by you or by the marketplace you sell on.

How It Works

1. You're registered to collect sales tax, usually in the state where you're buying. Some states also accept a registration number from another state; see below. (Not sure whether you need a permit? See Do You Need a Reseller Permit to Sell Online?)
2. You give your supplier your resale certificate at or before the time of purchase. Texas, for example, deems a certificate accepted in good faith if, among other things, it's taken "at or before the time of the transaction" (34 Tex. Admin. Code § 3.285).
3. If the supplier accepts it, you don't pay sales tax on that purchase. In Texas, the item "is exempt from sales or use tax if the seller accepts a properly completed Form 01-339" (Texas Comptroller).
4. You collect and remit sales tax when you sell the goods to your customer, unless a marketplace collects it for you. Texas says the purchaser "must collect, report, and remit tax" when it sells taxable items (34 Tex. Admin. Code § 3.285).

State-by-State Certificates

Many states have their own resale certificate forms:

• California: CDTFA-230, General Resale Certificate (CDTFA)
• Texas: Form 01-339, Texas Sales and Use Tax Resale Certificate; the back of the same form is an exemption certification for other exemptions (Texas Comptroller)
• New York: Form ST-120, Resale Certificate (NY DTF)
• Pennsylvania: Form REV-1220, Pennsylvania Exemption Certificate, a multi-purpose exemption form on which resale is one of the reasons you can claim (PA Department of Revenue)
• Illinois: Form CRT-61, Certificate of Resale (Illinois Department of Revenue)

Two multistate forms also exist:

• The Streamlined Sales Tax Certificate of Exemption (Form F0003) is "accepted by all 24 Streamlined member states," but "not all states allow all exemptions listed" on it, and "a state may require a state specific ID number for a specific exemption" (SSTGB). Texas says the Streamlined certificate "may not be accepted as a resale certificate" there (34 Tex. Admin. Code § 3.285).
• The Multistate Tax Commission's Uniform Sales & Use Tax Resale Certificate is one that "36 States have indicated can be used as a resale certificate," though the Commission "cannot guarantee that any state will accept this certificate" (MTC, certificate).

What You Need to Provide

Requirements vary by state. Texas, for example, requires a resale certificate to show (34 Tex. Admin. Code § 3.285):

• Your name and address
• Your sales tax permit number, or a statement that an application for a permit is pending
• A description of the items you generally sell and the items you're buying
• Your signature and the date
• The seller's name and address

California also requires the certificate to say you're buying "for resale": "The use of phrases such as 'non-taxable,' 'exempt,' or similar terminology is not acceptable" (CDTFA Regulation 1668).

The supplier keeps your certificate on file. A supplier that accepts it properly is generally protected if you misuse it, but only on conditions. Texas says a seller "does not owe tax on a sale, lease, or rental of a taxable item if the seller accepts a properly completed resale certificate in good faith" (34 Tex. Admin. Code § 3.285), and tells sellers they "should not accept the certificate if you know or have reason to believe the property is being purchased for other than resale" (Texas Comptroller). California says a certificate taken timely, in proper form and in good faith "relieves the seller from liability for the sales tax" (CDTFA Regulation 1668).

What If You're Registered in Multiple States?

You can provide resale certificates in any state where you have a valid sales tax permit. If you're registered in California, Texas, and Florida, you can provide a California resale certificate to California suppliers, a Texas certificate to Texas suppliers, etc.

For multi-state purchasing, the Streamlined Sales Tax certificate covers its member states and the MTC certificate covers the states that accept it, each with the limits above.

What If You're Not Registered in the State?

You may still be able to buy for resale there, depending on the state:

• Texas: a seller "may accept a resale certificate in lieu of tax from a retailer located outside Texas who purchases taxable items for resale in the United States or Mexico," showing "the registration number assigned to the purchaser by the state in which the purchaser is authorized to do business" (34 Tex. Admin. Code § 3.285).
• California: a purchaser who isn't required to hold a California permit "because the purchaser makes no sales in this state" explains why on the certificate instead of giving a permit number (CDTFA Regulation 1668).
• Illinois: Form CRT-61 lets "an out-of-State purchaser authorized to do business out-of-State and not required to be registered as a retailer or reseller in Illinois" give another state's registration number, if it "will resell and deliver this property only to purchasers located outside the State of Illinois" (Illinois Department of Revenue).
• Streamlined Sales Tax states: if you're required to be registered in the state, give "your sales tax ID number issued by that state"; if you're not registered there, the form says to "provide your sales tax ID number issued by any state" (Form F0003).

Other states are stricter. The MTC notes that "some states require that the reseller (Buyer) be registered to collect sales tax in the state where the reseller makes its purchase" (MTC). Check the rules of the state where you're buying.

Sourcing at thrift stores, flea markets or estate sales? See resale certificates for thrift and flea market sourcing.

Misuse of Resale Certificates

If you buy something tax-free with a resale certificate and then use it yourself instead of reselling it, you owe the tax. Texas says: "If you use the merchandise that you purchased by issuing a resale certificate, then you owe tax on the merchandise" (Texas Comptroller).

Knowingly misusing a certificate is more serious:

• Texas: it's a criminal offense, from a Class C misdemeanor when the tax evaded is under $20 up to a second-degree felony at $20,000 or more (Texas Comptroller).
• California: a purchaser can owe the tax and interest, and may be required to pay "a penalty of 10 percent of the tax or $500, whichever is greater, for each purchase made for personal gain or to evade payment of tax," or a 25 percent penalty for fraud or intent to evade the tax (CDTFA).

California, for one, says that "as part of the audit process, we routinely examine resale certificates" (CDTFA).

How Taxero Handles Resale

When you cross a state's threshold, "Taxero alerts you and handles registration on your behalf" (How it works). Once you're registered in a state, you can use that registration to issue the state's resale certificate to your suppliers.

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