Sales of tangible personal property (TPP) are presumed to be taxable unless specifically identified as not taxable. However, certain exemptions could apply making the sale of TPP exempt from sales tax in some situations. An exemption could be related to the type of business that is buying the TPP – a non-profit or government entity in certain states for example. But the most common type of exemption is a resale exemption and is applicable to wholesale transactions.
In a wholesale transaction, the buyer intends to resell the item to another entity or end-user. The buyer wants to make the original purchase exempt from sales tax, and they expect to then charge sales tax when they sell the item. The buyer will present a resale exemption certificate to their vendor who is relieved of the burden of charging and collecting the sales tax.
Assessing your footprint
Sales tax obligations start with nexus. The concept that enables state and local governments to require businesses to collect and remit sales tax on the products and services they sell.
For some 50 years we operated under a physical presence test for sales tax obligations. Then came 2018’s South Dakota vs. Wayfair, in which the U.S. Supreme Court ruled that the state of South Dakota could require businesses with no physical presence in a state to collect and remit sales tax. The ruling opened the door for South Dakota to have since raked in tens of millions of dollars annually in revenue from out-of-state sellers. Today all 45 states that have a sales tax (and D.C.) have economic nexus laws.
How does this affect a typical wholesale transaction?
As noted above, historically, wholesalers have purchased items exempt from sales tax and then charged the applicable sales tax in states where they have sales tax nexus. This is still true today; however, the proliferation of e-commerce has increased the number of drop shipment transactions with the wholesaler often sitting in the middle of the end consumer and the manufacturer. Wholesalers have always dealt with drop shipments, but it is much more common today. These drop shipment transaction have some unique rules that can be confusing.
Many companies now have an online presence for taking orders and making retail sales of TPP without maintaining any inventory. Instead, they are leveraging other suppliers/distributors who “drop ship” directly to the customer.
As an example, a distributor/wholesaler in Arkansas sells to a retailer in South Carolina and drop ships to the retailer’s customer in Illinois. The Arkansas distributor/wholesaler has nexus in Illinois and is registered for sales and use tax purposes in Illinois. As a result, the Arkansas distributor/wholesaler is required to charge Illinois sales tax unless an applicable resale exemption certificate is provided. The South Carolina retailer does not have nexus in Illinois and is not registered for Illinois sales and use tax purposes, and therefore is unable to provide a valid Illinois resale exemption certificate..
There are approximately 10-15 states that operate similar to Illinois; however, many states will allow an out-of-state resale exemption certificate in a drop shipment transaction. Georgia, where TaxConnex is headquartered, allows for an out-of-state resale exemption certificate in this situation.
Resale Exemption Certificates
A resale exemption certificate must contain specific information: state tax ID numbers, the name of the seller and customer, the type of exemption, and a valid signature and date from the customer. They must also be signed and dated.
At a minimum, you should consider an exemption form expired after three years. Different states have different rules. In Florida, they expire annually, for instance; still other states say a resale certificate is valid until it’s revoked.
Wholesalers don’t need nexus in a state or even a taxable product to request an exemption certificate. When companies have a questionable nexus footprint we suggest they get exemption certificates while doing business in that state. These forms are especially important in sales tax audits.
And there’s an infinite number of forms. In some states they can be customized, and in Florida you can use a printable online template. This can all create headaches and anxiety as to whether an exemption certificate is valid.
As is always the case with sales tax compliance, a wholesaler is better off safe than sorry.
(Check out our webinar Multi-Channel Selling & Your Sales Tax Obligations.)
Contact TaxConnex to learn about our services in providing a sales tax compliance service that will take the burden off you.