Sales tax. Reseller permits. Tax permits. Resale certificates. Let’s face it—when it comes to setting up your online business, it can get really confusing. It can also get really expensive if you don’t take advantage of some of the tips and tricks that can save you money as you enter the world of e-commerce (including how to save on sales taxes!)
Which is why I’m here.
Nope. Not Alison.
I’m doing a takeover of Alison’s blog so I can share some of the ins and outs we’ve learned over the years about sales tax and online businesses.
One of the big sales tax topics surrounds what’s called a resale certificate or sometimes a reseller's permit, so I’m jumping in to talk about why it’s worth going through the process of getting one.
Get ready: we’re going to do some math:
Let’s suppose you find some shirts to sell in your e-commerce online store for just $5 each—and you decide to buy 100 of them from the wholesaler.
That means you’re going to spend $500 in product.
And suppose the wholesaler is located in a state that charges 8.25% in sales tax, which means you are also going to have to pay an additional $41.25 in sales tax.
Ugh! That means you’re going to have to either charge a higher price OR just give up some of your profit. As entrepreneurs, we hate both of those options.
If you have a reseller’s permit, you don’t pay that extra amount in sales tax. It stays in your pocket rather than having to go into the pocket of a government in a state you might not even live in.
UNDERSTANDING RESALE CERTIFICATES AND SALES TAX
Never heard of a reseller’s permit? Neither had we until Alison started her first e-commerce business and we had to become way more informed about sales tax than we ever thought we’d be. And to confuse it further, different states may call it different things, like:
- resale permit
- exemption certificate
- sales tax permit
- reseller's permit
- seller's permit
- that thingy that saves money when we resell products
In Utah, where we got our feet wet in the online business world, this reseller's permit was simply our state sales tax ID number. This is why, with each state doing things slightly different—including the percentage of sales taxes they charge—I recommend that you call the commerce department in your state. Usually, they’re great about sharing information about whether you need to apply for a separate license or resale certificate or if you can just utilize your state tax ID number. This is one call that Can save you big money. It’s so worth it.
We’ve been operating e-commerce online stores for about 10 years, and over that time we’ve heard rumors or read articles that some states do require you to purchase a resellers certificate for that state. California happens to be one of them; however, we’ve been able to use our Utah state resale certificate number to make product purchases sales-tax-free purchases. This again shows that a quick phone call to your vendors to ask the right questions can ultimately save you money (and hassle!)
Here is a list of states with hyperlinks (where available) that require their own certificate/permit.
- Washington, DC (Okay, it’s not a state, but you still need to be aware of it so I added it.)
WHAT YOU’LL NEED TO APPLY FOR A RESELLER’S PERMIT
Here’s the kind of information you’re likely to need if you do need to apply for a reseller’s permit:
- Details about your business
- Name and address of the business
- EIN (that’s your federal tax ID number)
- Sales tax ID (if this isn’t the same in your state)
- Type of business
- Details about what you buy
- List of items you intend to buy from wholesalers (clothing, accessories, etc.)
- Other items you expect to get a break on sales tax
- Personal info
- ID with name and address
WHAT A RESALE CERTIFICATE DOES NOT DO
A reseller’s permit is awesome because it can definitely save you money…however…it is not going to keep you from paying sales tax altogether.
- You still have to pay sales tax when you SELL your product, depending on the state you and they are located in. One concept that helps me understand this is the idea of the “end-user.” In other words, who is going to consume, wear or use your product. If you are selling your tee-shirt to a high school kid to wear to school, you must charge sales tax in your state if it is required.
- You still have to pay sales tax for other business expenses like office supplies, packing materials, crazy file folders with llama designs on them if you live in a state that charges a sales tax. But don’t fret—you will be able to include those expenses on your year-end tax return.
AND ONE LAST THING…
There’s something I also want to give you a heads-up on while I still have control here on the blog. That is about something called “use tax.” If at the end of the year you do have some product/inventory left over, this is a tax that the state may require you to pay. Yep—it sounds kind of scary, but it’s not. Just talk with your business accountant on how to handle overstocked inventory.