Everything you need to know about Obtaining a License and following Tax Laws
What is a Reseller License?
Whether you are starting an online or brick and mortar retail store (this includes selling on websites like Facebook and eBay), you will need to have a Reseller License. This license allows your business to not pay any sales tax on wholesale products purchased for the purpose of reselling them to your customers.
What this document actually is can be confusing because the license's name can vary based upon the state that issues it. A Reseller License may be called a reseller permit, resale license, resale certificate, sales tax permit, or some other name. The name does not matter as much as what it is intended to be used for.
How Does a Reseller License Work?
A Reseller License allows a state to identify a business as a collector of sales tax. Reseller Licenses are required for sole proprietors and all business types that sell tangible property to the public as a wholesaler or a retailer.
When a business has a Reseller License, that business is not required to pay sales tax on the wholesale product purchased for the purpose of reselling. Reseller Licenses prevent the double collection of sales tax on tangible products. Alternatively, it gives the company the right to charge their customers the sales tax when the product is resold and remit it to the state. The frequency of the filing may vary from state to state, but it could be monthly, quarterly, or annually.
ONLY FIVE STATES do not charge state sales tax, and because of this, they do not require resellers to have a Reseller License. Although two of these states allow the local cities within the states to charge sales tax. These states are as follows:
- Delaware - No Reseller License required
- Montana - No Reseller License required
- New Hampshire - No Reseller License required
- Oregon - Reseller License MAY STILL be required for local municipalities
- Alaska - Reseller License MAY STILL be required for local municipalities
It is important to point out that this license does not allow the company to avoid paying sales tax on the products it purchases for internal use and does not resell.
Sales tax laws vary by state. Each state has its own laws and tax rate tables. Some states also have local tax rates that must be collected for different counties, cities, or even parts of a city. As of January 2020, forty-five states and the District of Columbia collect statewide sales tax. Local sales tax is required to be collected in thirty-eight states.
For additional information about state-by-state tax rates and local tax rates (averaged), CLICK HERE to view the table on the Tax Foundation's website.
What States Do I Owe Sales Tax?
In a recent, groundbreaking Supreme Court case, South Dakota v. Wayfair, it was found that as a reseller in another state, you may be obligated to report and pay sales tax to the state where the buyer is based out of. Determining whether a business has nexus in a state dictates whether the sales tax is owed.
Whether a business has physical nexus or economic nexus in a state determines if it must collect sales or use tax on the products it sells.
Whether a reseller has sufficient physical or economic nexus in a state can be confusing because each state has different requirements. As the physical nexus is more straightforward, for this article we will focus on the economic nexus.
Typically, a business has an economic nexus in a state if one of the following conditions exists in the trailing twelve months.
- Sales of $100,000 in revenue
- 200 or more transactions Not every state has the same revenue threshold and some do not even have a transactions threshold. A good rule of thumb is: if you are anywhere close to the numbers above for a specific state, you need to check into whether your business has an economic nexus for that state.
When a business is considered to have nexus in a state, it will be expected to collect sales tax for that state.
An article that can be reviewed for state-by-state legislation is found at the link below: https://www.avalara.com/us/en/learn/guides/state-by-state-guide-economic-nexus-laws.html
What is a Reseller License Not?
The documents issued are slightly different in each state, but a Reseller License is not a Federal Employer Identification Number. The EIN is issued by the federal government and is like a social security number for your business. The Reseller License is issued by the state government and is specifically for the purpose of collecting and remitting sales tax to the local government.
Example of an EIN Letter from the Federal Government:
Example of a Reseller’s License from the State Government:
When to Use a Reseller License
Normally, when a business is setting up an account with a new wholesale company to purchase product for resale purposes, the wholesale company will request a copy of the reseller license or some other form of proof that the business has a reseller license. This allows the reselling business to make the purchase without paying the sales tax. The reseller will provide a copy of the reseller license or tax exemption certificate (depending on the state) to the wholesaler at this time. A copy of the certificate is all the proof the seller needs if the state ever questions why he did not collect tax for the purchase.
Risks of Purchasing without a Reseller License
Find our article written on this topic HERE. You need to seriously read this article if you are purchasing without a Reselle
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As with any start-up business, it takes experience, testing, and adaptation to create success. I hope I have helped prepare you for the beginning stages of your upcoming business venture, and perhaps interested you in developing a relationship with me. If you have additional questions, comments, or just want to chat about the industry, please do not hesitate to reach out to me through our contact page. I am here to help you!