California resale certificate: buying for resale without sales tax

What a California resale certificate is

The California Department of Tax and Fee Administration (CDTFA) sets the rule in Regulation 1668, Sales for Resale, and explains it in its guide, Publication 103, Sales for Resale. The rule itself is short: "A sale for resale is not subject to sales tax."

The resale certificate is the proof. When a seller accepts a valid certificate in good faith and in a timely manner, the seller does not owe tax on that sale.

CDTFA says: "We do not provide resale certificates." You fill the form in yourself and give it to each supplier. The form is also optional: "Any document, including a letter, note, purchase order, or preprinted form, can serve as a resale certificate", as long as it carries the details listed further down.

Cities and counties can add their own rules. A seller's permit is not a local business license. For that, CDTFA says to contact your city and/or county business license department to obtain a separate business license. This page is general information, not legal or tax advice.

California resale cert rules at a glance

For a case that does not fit, CDTFA notes that it is best to get tax advice in writing.

Who can issue a CA resellers certificate

Any business that sells goods can issue one, wholesalers as well as retailers. The CDTFA seller's permit FAQ notes that "Both wholesalers and retailers must apply for a permit."

A buyer normally quotes a California seller's permit number on line one of the form. The permit is valid only as long as you are actively engaged in business as a seller. There is one exception: CDTFA states that a purchaser is not required to hold a seller's permit to issue a valid resale certificate. Such a buyer writes on the certificate an explanation stating why it is not required to hold a seller's permit. CDTFA's examples are businesses that sell only in interstate and foreign commerce or sell only products that are tax-exempt (such as raw fruits and vegetables).

Buying materials tax free: what the certificate covers

For makers, the materials rule matters most: materials that end up inside the product you sell count as bought for resale. CDTFA lists these uses of a resale certificate:

• Finished goods: finished items for resale.
• Materials: materials that will become a physical part of an item that will be held for resale.
• Display stock: items solely for demonstration or display while holding them for sale.

Example: a candle maker buys wax and wicks with a resale certificate, because both become a physical part of the candles she sells. The pouring pitcher and the heat gun stay in the workshop, so she pays sales tax on them.

If you buy through purchase orders and one order mixes materials and tools, CDTFA's example is that the order should specify that the raw materials are purchased for resale and that the sale of the tooling is subject to tax.

What you cannot buy with a resale certificate

CDTFA's list of goods you cannot buy this way is in the table above. Service businesses need the most care. CDTFA says: "Service providers are generally considered to be the end-users of products they use in providing services to customers."

A salon shows where the line falls. Products sold for clients to take home may qualify ("Items for resale to customers for off-premises use: shampoos, hair tonics, brushes, cosmetics"). Products used on clients in the chair are generally taxable purchases ("Items used to service customers on-site: shampoo, brushes, cosmetics, cleaning supplies, office supplies"). CDTFA adds: "These listings are intended as general guidelines and may not apply in every situation."

If you buy stock for resale and then use some of it yourself, you owe use tax. Regulation 1668, Sales for Resale, says: "A person who purchases property for resale and who subsequently uses the property owes tax on that use." By signing the form you also agree that "I will owe use tax based on each item’s purchase price."

If you paid tax on an item and resell it before any taxable use, CDTFA lets you deduct its cost before tax on your return, under "Cost of Tax-Paid Purchases Resold Prior to Use."

How to get a resale certificate in California

There is no application for the certificate itself. You need a seller's permit, then you complete the form for each supplier.

1. Register for a seller's permit with the CDTFA

   CDTFA has a free way to register online for a permit, though the CDTFA may require a security deposit to cover any unpaid taxes. Skip this step only if your business falls under the no-permit exception.

2. Download the general resale certificate form

   Download CDTFA-230 from cdtfa.ca.gov. Some trades have their own version, such as CDTFA-230-A, Resale Certificate for the Auto Body Repair and Painting Industry.

3. Fill in your details

   Line one reads "I hold valid seller’s permit number". Line two asks you to name what you sell: "the following type of tangible personal property". Line three names the vendor, and line five asks for a "Description of property to be purchased for resale".

4. Describe what you will buy

   CDTFA accepts either kind of description: A list of the particular items to be purchased for resale, or A general description of the type of items to be purchased for resale. A general description suits a blanket certificate.

5. Sign it and give it to the supplier on time

   CDTFA treats a certificate as timely if it is taken at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of the property to the purchaser. CDTFA notes: "Accepting a resale certificate late does not relieve the seller from liability for the tax."

What the CA resale certificate form must include

Whether you use the CDTFA form, a letter or a purchase order, the document is valid only if it contains all of these:

1. The name and address of the purchaser's business.
2. The purchaser's seller's permit number or an explanation stating why the purchaser is not required to hold a seller's permit.
3. A description of the property to be purchased.
4. A statement that the property is bought for resale. The document must contain the phrase "for resale."
5. A date, although an otherwise valid resale certificate will not be considered invalid solely because it is undated.
6. The signature of the purchaser, purchaser's employee, or authorized representative.

Wording matters. Phrases such as "nontaxable" or "exempt" are not acceptable. A purchase order can serve as the certificate only if it carries all of these items, and CDTFA says a purchase order that only shows the tax amount as $0 or is left blank, will not be accepted as proof that the goods are for resale.

Paper is not required. Digitally signed resale certificates provided electronically can be considered valid as long as they contain all the essential elements of a valid resale certificate.

What suppliers check when you hand one over

A supplier that accepts a valid certificate in good faith and in a timely manner does not owe the tax on that sale, so it has a reason to check yours. It can confirm your permit with CDTFA's online tool, "Verify a permit, license, or account", or by calling 1-888-225-5263, available 24 hours a day, seven days a week.

Expect questions if you buy something your business does not ordinarily sell. In that case, CDTFA says, the seller should require a resale certificate that states that the specific property is being purchased for resale. Its example: if a furniture maker attempts to buy office supplies for resale, the seller should ask whether the purchaser intends to sell the office supplies.

A blanket certificate also puts a duty on the buyer. CDTFA's rule: "If they make a purchase that is not for resale, they must let the seller know."

Penalties for misusing a California resale certificate

CDTFA says: "we routinely examine resale certificates to ensure that they support legitimate purchases for resale." If a buyer knowingly issues a resale certificate when purchasing items that they will not resell, the tax and interest are owed in every case, and CDTFA may add one or both penalties:

• The amount of tax that would be due had the certificate not been used.
• Interest on the tax due (computed from the time the item was purchased).
• 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.
• A 25 percent penalty for fraud or intent to evade the tax.

The buyer also may have their seller's permit revoked. Buyers who give a completed resale certificate to the seller with the intent to evade reporting or paying tax can be found guilty of a misdemeanor. Each offense is punishable by a fine of not less than $1,000 and not more than $5,000, imprisonment not exceeding one year, or both.

Questions about a specific purchase go to the CDTFA Customer Service Center at 1-800-400-7115 (TTY:711).

Where Nation fits

Questions about the California resale certificate