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What is resale certificate in Canada?

What is a Resale Certificate?

A resale certificate is an official document issued by a business to indicate that they are purchasing goods or services for the purpose of reselling them to customers rather than for their own use. This certificate allows the business to buy items without paying sales tax on them. Instead, the responsibility for collecting and remitting the appropriate sales tax is shifted to the final consumer who purchases the goods.

Resale certificates are typically used in business-to-business transactions, where one business is buying products from another business with the intention of reselling them to end consumers. The certificate serves as proof that the purchasing business is a legitimate reseller and is entitled to be exempt from paying sales tax on the items they acquire for resale.

To use a resale certificate correctly, businesses must adhere to specific regulations and guidelines set forth by their local tax authorities. This includes ensuring that the purchased items are indeed intended for resale and not for the business's own use. Misusing a resale certificate can lead to legal and financial consequences.

In essence, a resale certificate streamlines the taxation process in the supply chain by allowing taxes to be collected only when the end consumer makes the final purchase, rather than at each intermediate step of the distribution process.

Types of Resale Certificates

There are several types of resale certificates that businesses can use, each tailored to specific circumstances and industries. Here are some common types:

Standard Resale Certificate: This is the most common type of resale certificate. It allows businesses to purchase goods without paying sales tax, as long as those goods are intended for resale. This certificate is used for general reselling purposes.

Multijurisdictional Resale Certificate: In cases where a business operates in multiple states or jurisdictions, this certificate is used to streamline the resale exemption process across those areas. It ensures that the business doesn't have to obtain a separate certificate for each location.

Drop-Ship Resale Certificate: Businesses that engage in drop-shipping, where they sell products without physically stocking them and the supplier ships directly to the customer, can use this certificate. It allows them to avoid paying sales tax on items shipped to customers.

Occasional Sale Resale Certificate: Some states offer an occasional sale exemption for businesses that don't normally engage in selling taxable items but might do so occasionally, such as a restaurant selling its equipment. This certificate provides temporary exemption for such sales.

Streamlined Sales Tax (SST) Certificate: In states that participate in the Streamlined Sales Tax Agreement, this certificate helps businesses simplify the process of collecting and reporting sales tax across multiple states.

Resale Exemption Certificate for Online Marketplaces: With the rise of online marketplaces, some states have introduced certificates specific to these platforms. It enables sellers on these platforms to buy goods for resale without paying sales tax.

Manufacturer's Exemption Certificate: This certificate is used by manufacturers to buy raw materials, components, and equipment without paying sales tax. The items they purchase will be used in the production process of creating their own products.

Agricultural Exemption Certificate: Agricultural businesses can use this certificate to buy items like equipment, seeds, and fertilizers without paying sales tax, as these items are crucial for their agricultural operations.

Government Resale Certificate: Government entities can use this certificate to purchase goods for resale without paying sales tax. It applies to federal, state, and local government bodies.

Direct Pay Permit: While not exactly a resale certificate, a direct pay permit allows businesses to purchase items tax-free but then remit the appropriate sales tax directly to the tax authorities.

It's important to note that the availability and requirements of these certificates can vary by state and jurisdiction. Businesses should always ensure they understand their local regulations and use the correct certificate for their specific situation.

Certificates for resale

When buying things to sell again, registered sellers can get around paying sales tax by giving their supplier a resale certificate. A resale certificate shows that the person who bought the thing had good faith that they would sell it again and pay tax on the final sale.

You can also accept resale certificates from people who want to buy things to resell them.

The certificate can look like anything, but you can find a blank selling certificate online. Any kind of certificate is fine as long as it has:

  • The buyer's full name and shipping address.

  • The number on the seller's permit (unless the buyer is exempt from having one).

  • A detailed description of the property that will be bought.

  • A clear statement that the property mentioned is being bought to resell.

  • The document's date.

  • The signature of the buyer or someone authorized to act on his or her behalf.

Some companies don't need to have a seller's permit. For example, a business can't sell things in this state or sell things that are taxed when sold at retail. If you sell to a buyer who doesn't need a seller's permit but still wants to use a trade certificate, the buyer must write on the certificate that he or she doesn't have a seller's permit and explain why a permit isn't needed.

Sale for resale

People who are in the business of selling tangible personal property can get resale certificates when they buy things they will sell as part of their usual business. When a seller in good faith and on time takes a valid resale certificate, the seller does not have to pay tax on the sale. CDTFA-230, the General Resale Certificate, can be given by buyers when they buy goods that they will resell as part of their normal business.

Most of the time, selling certificates are:

  • When buying finished goods to sell on.

  • When getting parts that will be used to make something that will be sold again.

  • When a business buys something just to show or demo it and then puts it on sale as part of normal business processes.

Buyers shouldn't use a resale ticket to buy something they:

  • Use instead of selling,

  • Use in their business before selling it,

  • Use for your own purposes,

  • Keep it as an investment so that its value will go up and you can sell it in the future.

Purchases to resell should be legal.

Before taking a resale license, it's important for sellers to know what kind of business the buyer runs. If a buyer wants to buy something that they don't usually sell, the seller should ask for a trade certificate that says the item is being bought to sell in the normal course of business.

On the selling certificate, property bought to be sold again must be described by:

  • A list of the specific things to be bought to sell again, or

  • A general description of the kinds of things that will be bought to sell again.

For example, if a company that makes furniture wants to buy office supplies to resell them, the seller should ask if the buyer plans to sell the office supplies as part of their normal business. If the answer is yes, the seller should protect themselves by having the furniture maker put "office supplies" on the resale certificate. If the answer is no, the seller should treat the sale as taxable. If a buyer uses a selling certificate in a bad way, they may have to pay fines and interest. If a resale license is used wrongly on purpose, the person who did it can be charged with a crime.

If a buyer paid sales tax to a supplier on things they bought for business or personal use but then resold them before they were used in a taxable way, the buyer can take a tax deduction when they report the sale on their tax return. On their sales and use tax return, the buyer can subtract the amount they paid before sales or use tax was added. This is called "Cost of Tax-Paid Purchases Resold Before Use."

Counterfeit merchandise sales are subject to taxation.

If someone is found guilty of selling or buying fake goods, all of their sales and purchases of fake goods will be taxed. This is true whether they make the fake goods, sell them wholesale, distribute them, or sell them in stores. No one can claim a resale credit for selling fake goods anymore, and anyone who buys fake goods to sell them later will also have to pay taxes on them.

Goods with a fake mark are often called "counterfeit goods." In general, a bogus mark is a mark that is the same as or very similar to a mark that has been registered with the U.S. Patent and Trademark Office. In California, it is against the law for anyone to make, sell, or be in possession of fake goods with the plan to sell them.

The California Department of Tax and Fee Administration (CDTFA) may send a bill for unpaid sales or use tax to the person guilty of trafficking in fake goods within a year of the last day of the month after the date of conviction. By sending bills to people who have been convicted of selling fake goods, we are discouraging the illegal sale of fake goods and making sure that all companies are on the same level.

If you think people are selling fake things, please go to the TRaCE Task Force page. There, you can find out how we're working with other groups to stop illegal business practices and how to report a crime.

Benefits of Resale certificates

Resale certificates offer several benefits to businesses engaged in the sale of goods or services. Here are some of the key advantages:

  • Sales Tax Savings: The primary benefit of a resale certificate is that it allows businesses to purchase goods without paying sales tax. This can result in significant cost savings, especially for businesses that deal with high-value inventory or operate in areas with substantial sales tax rates.

  • Cost Efficiency: By not having to pay sales tax on purchases intended for resale, businesses can allocate their funds more efficiently. This can lead to improved cash flow and potentially higher profits.

  • Streamlined Transactions: Resale certificates streamline the purchasing process for resellers. Businesses don't need to factor in sales tax calculations when making purchases, making transactions faster and simpler.

  • Competitive Pricing: The savings from not paying sales tax can be passed on to customers in the form of more competitive pricing. This can help businesses attract more customers and increase sales.

  • Reduced Administrative Burden: Without the need to track and calculate sales tax on every purchase, businesses can reduce administrative workload and associated costs.

  • Supply Chain Efficiency: Resale certificates enable smoother collaboration with suppliers. Businesses can buy inventory without adding the complexity of sales tax, making it easier to maintain relationships with suppliers.

  • Flexibility in Inventory Management: Businesses can stock up on inventory without the immediate financial burden of sales tax. This flexibility allows for better inventory management and the ability to take advantage of bulk purchasing opportunities.

  • Compliance with Tax Regulations: Using resale certificates correctly ensures that businesses remain in compliance with tax laws. This helps avoid potential legal issues and penalties that can arise from misreporting or not paying the correct sales tax.

  • Encourages Resale Activities: Resale certificates incentivize businesses to engage in reselling activities, which can stimulate economic growth and support various industries within the supply chain.

  • Industry-Specific Benefits: Different types of resale certificates cater to specific industries. For instance, manufacturers can benefit from manufacturer's exemption certificates by saving on taxes for raw materials.

  • Cross-Jurisdictional Operations: Multijurisdictional resale certificates facilitate businesses operating in multiple states, helping them navigate varied tax regulations more easily.

  • Drop Shipping Advantages: Drop-ship resale certificates enable businesses to operate efficiently in the e-commerce space by allowing tax-free purchases when items are shipped directly to customers.

It's important to note that while resale certificates offer numerous benefits, they must be used correctly and ethically. Misusing resale certificates for non-resale purchases can lead to legal consequences. Businesses should always consult with tax professionals and understand their local tax regulations to ensure compliance and maximize the advantages of resale certificates.

FAQS

1. What is a resale certificate, and why is it important? 

A resale certificate is an official document that allows businesses to buy goods for resale without paying sales tax. It's important because it streamlines the taxation process in the supply chain and helps businesses save money on sales tax for items intended for resale.

2. Who can use a resale certificate? 

Businesses engaged in reselling goods to end consumers can use resale certificates. These certificates are typically used in business-to-business transactions where one business purchases products from another business for resale purposes.

3. What information should a resale certificate include? 

A resale certificate should include the buyer's full name and shipping address, the seller's permit number (if applicable), a detailed description of the property to be bought, a statement indicating that the property is being bought for resale, the date of the document, and the buyer's signature or authorized representative's signature.

4. Are there different types of resale certificates? 

Yes, there are various types of resale certificates tailored to specific circumstances and industries. Some examples include standard resale certificates, multijurisdictional resale certificates, drop-ship resale certificates, occasional sale resale certificates, and more.

5. How do multijurisdictional resale certificates work? 

Multijurisdictional resale certificates are used by businesses operating in multiple states or jurisdictions. Instead of obtaining separate certificates for each location, this certificate streamlines the exemption process across different areas, allowing the business to make tax-free purchases for resale.

6. Can online marketplace sellers use resale certificates? 

Yes, some states offer resale exemption certificates specific to online marketplaces. These certificates enable sellers on online platforms to buy goods for resale without paying sales tax.

7. What's the difference between a resale certificate and a direct pay permit? 

A resale certificate allows businesses to buy items for resale without paying sales tax, shifting the tax responsibility to the end consumer. A direct pay permit, on the other hand, allows businesses to purchase items tax-free but requires them to remit the appropriate sales tax directly to the tax authorities.

8. What are the benefits of using resale certificates for businesses? 

Resale certificates offer several benefits, including sales tax savings, improved cost efficiency, streamlined transactions, competitive pricing, reduced administrative burden, better supply chain efficiency, and compliance with tax regulations. They also encourage resale activities and offer industry-specific advantages.