Resale certificate: how makers buy materials without sales tax

What is a resale certificate?

A resale certificate is a signed statement from a buyer to a seller that says the goods are being bought to resell. It lets the sale between two businesses skip sales tax, because the tax is collected later, when the finished product is sold to the customer.

For a maker, this covers more than finished goods. California's tax agency, the CDTFA, says resale certificates are generally used for materials that will become a physical part of an item that will be held for resale. Texas says the same in its own words: you can buy tax free items you intend to resell as an integral part of other merchandise or a taxable service. Wax that goes into a candle, yarn that becomes a scarf and silver wire that becomes an earring are examples.

The certificate protects the supplier. In California, when a seller accepts a valid resale certificate in good faith and on time, the seller does not owe tax on that sale. In Texas, the certificate is the seller's record of why no tax was collected, and the seller keeps it for four years.

Resale certificate, sales tax exemption certificate, reseller's permit: the names

Sellers and suppliers use several names for two documents. One is the permit you get from your state to collect sales tax. The other is the certificate you hand to a supplier to buy without tax. You need the first before you can use the second.

The two documents are not interchangeable. Texas says the customer's sales tax permit number or a copy of the permit is not a substitute for a resale certificate.

A resale certificate cannot be used for other exemptions. The multistate form says a buyer claiming any other exemption cannot use this form and must provide to the seller the proper state exemption certificate for that specific exemption.

What a maker can buy tax free with a resale certificate

The test is whether the item is sold to your customer, either as it is or as part of what you make. California lists three common uses for a resale certificate:

• Finished goods: when purchasing finished items for resale.
• Materials: materials that will become a physical part of an item that will be held for resale.
• Display items: items bought solely for demonstration or display while they are held for sale.

Example: a candle maker buys wax, wicks, fragrance oil and glass jars. Each of these ends up in the candle the customer takes home, so each can go on a resale certificate. The same maker also buys a pouring pitcher, a heat gun and a thermometer. These stay in the workshop, so they do not go on the certificate.

Packaging, shipping supplies and free samples are less clear-cut. Check your own state's guidance before you put them on a certificate.

What a resale certificate does not cover

California says buyers should not use a resale certificate for a product they will use rather than sell, or use in their business before they sell it. Tools, equipment, office supplies and anything you keep for yourself do not go on a resale certificate, even when you buy them from the same supplier as your materials.

Texas gives two working rules. First, do not use a resale certificate if there is any question whether you will resell the property. Second, when an order mixes resale and non-resale items, tell the vendor clearly which items will be resold and which are not for resale.

Texas also says if you use merchandise bought with a resale certificate, you owe tax on it. To pay it, include the amount on the taxable purchases line of your sales tax return.

How to get a resale certificate

Getting a resale certificate starts with a sales tax permit from your state. The permit number then goes on the resale form you give each supplier.

1. Register for a sales tax permit

   Apply to the tax agency in the state where you do business. The permit gives you the number the certificate asks for. In California, both wholesalers and retailers must apply for a permit, so a maker who sells only wholesale still registers.

2. Get your state's resale certificate form

   In California, the CDTFA does not provide resale certificates; a purchaser may download CDTFA-230 from its website. Texas uses Form 01-339, Texas Sales and Use Tax Resale Certificate. Some suppliers accept a multistate form, covered below.

3. Fill it in

   California lists what a valid certificate must contain: the name and address of the purchaser's business; the purchaser's seller's permit number, or an explanation stating why the purchaser is not required to hold a seller's permit; a description of the property to be purchased, either a list of the particular items, or a general description of the type of items; a statement that the items are for resale; the date of the document; and the signature of the purchaser, the purchaser's employee or an authorized representative. On the resale statement, the document must contain the phrase "for resale"; phrases such as "nontaxable" or "exempt" are not acceptable.

4. Give it to each supplier

   Send the certificate when you open a wholesale account. In Texas, a seller can accept a blanket resale certificate if the customer buys exclusively for resale, so a buyer who buys only for resale can give one certificate for later orders.

5. Keep a copy and update it

   Keep a copy of every certificate you issue. If your business name, address or permit number changes, send suppliers a new one.

Multistate resale certificates: the uniform and streamlined forms

Makers often buy from suppliers in other states. Such a supplier may ask for its own state's form or accept one of two multistate forms. The supplier's state decides which, so ask before you send one.

Neither form is accepted everywhere. For the uniform certificate, the Multistate Tax Commission cannot guarantee that any state will accept the certificate. The Commission adds that some states require the buyer to be registered to collect sales tax in the state where it makes the purchase, while other states accept the certificate with a registration number from another state, such as the buyer's home state.

One uniform certificate can cover repeat orders: in many states the certificate can be used as a blanket certificate, though some states require periodic replacement with a renewed certificate. The form also carries notes for single states. For Florida, the selling dealer must also get a resale authorization number from the Florida Department of Revenue using the purchaser's Florida Annual Resale Certificate number.

The Streamlined certificate is never filed with a state: do not send exemption certificates to the Streamlined Sales Tax Governing Board or to the states. Instead, purchasers give the completed certificate to their supplier and keep a copy for their records.

When a shop gives you a resale certificate

The same rules apply in reverse when you sell wholesale to a shop. The shop gives you its resale certificate, and you do not charge it sales tax. On the multistate form, if the seller does not have the certificate, it is obliged to collect the tax.

Texas tells sellers to make sure the certificate is properly completed and note the general character of the purchaser's business. Texas sellers can also verify that a seller's permit is active using the Comptroller's Sales Tax Permit Search. If a buyer orders something it would not normally sell, California says the seller should require a resale certificate that states that the specific property is being purchased for resale.

Penalties for misusing a resale certificate

In California, a buyer who knowingly issues a certificate for items it will not resell owes the tax that would have been due without the certificate, plus interest from the time of purchase. In addition, the purchaser may have their seller's permit revoked and may have to pay one or both of two penalties: 10 percent of the tax or $500, whichever is greater, for each purchase made for personal gain or to evade tax, or a 25 percent penalty for fraud or intent to evade the tax. A buyer who gives a certificate with intent to evade tax can be found guilty of a misdemeanor under Revenue and Taxation Code section 7153, and 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.

In Texas the penalty depends on the tax avoided: less than $20 of tax evaded is a Class C misdemeanor, and $20,000 or more of tax evaded is a felony of the second degree.

Rules for resale certificates vary by state, and cities and counties add their own sales taxes. This page is general information, not legal or tax advice. Check your state tax agency's guidance, or ask a tax professional, before you rely on a certificate.

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Questions about resale certificates