Many new business owners know that they need to collect sales tax on items that they sell, but they aren’t sure if they need a Seller’s Permit or a Resale Certificate. In California, this is an important distinction because while you might only need one, use of both may save you a significant amount of money if used properly.
All businesses that are 1) engaged in business in California and 2) sell or lease “tangible personal property” that is ordinarily subject to sales tax must have a Seller’s Permit issued by the California Board of Equalization. The definition for “engaged in business” is broad, and includes having an office, sales room, warehouse, or other place of business in the state; having a sales representative or agent operating in the state; or receiving rental payments from the lease of property in the state. Even if your sales are only temporary (lasting no longer than 90 days), such as seasonal sales, you at least need a temporary seller’s permit.
Tangible personal property (items that can be “seen, weighed, measured, felt, or touched”) that is “ordinarily subject to sales tax” includes both sales of the goods and any labor costs if the labor results in the creation of tangible personal property. For example, the total amount charged for a table that you made, which would necessarily include labor time, would be taxable, whereas the amount charged for your labor to fix a table would not be taxable because you are repairing existing property.
You can apply for a Seller’s Permit through the Board of Equalization, and if you have more than one business location you may need a separate permit for each location.
Once you have a Seller’s Permit, you use this account to report your sales and pay sales tax to the BOE online. Additionally, businesses that purchase goods from other suppliers solely for resale should also use a Resale Certificate so they only pay sales tax once on these products.
When a business purchases tangible personal property for resale, as opposed to personal use, this initial transaction will not be subject to sales tax if a Resale Certificate is properly in place. Use of a Resale Certificate ensures that you don’t pay sales tax on the goods first when you purchase them from the supplier, and then a second time when you sell them to a customer (even if the tax is pushed on to the customer). Instead, goods that are solely purchased for resale will be subject to sales tax only when they are finally sold for personal use.
In California, you can submit a form Resale Certificate to each supplier indicating that the goods that you are purchasing are solely for resale pursuant to a valid Seller’s Permit. You need to submit a Resale Certificate for each supplier, but if you make many purchases from the same supplier the initial certificate can be kept on file; you do not need a separate certificate for every purchase from the same supplier.
You should only use a Resale Certificate if you are absolutely certain that you will resell the goods. If you are not sure if you are purchasing the goods for personal use or resale, you should pay sales tax on the goods to the supplier, and then if you later decide to resell the item before using it for personal use, you can take a deduction on the tax return on which you report the sale.
Each state has its own rules regarding resale requirements, so if you are making purchases for resale from a supplier outside of California, make sure to ask that supplier what requirements, if any, exist to allow you to avoid sales tax on purchases made solely for resale. Such purchases may also be subject to California’s use tax.
Bend Law Group, PC helps many clients obtain Seller’s Permits and navigate Board of Equalization requirements each year. Please contact us if you have any questions about this process.
Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.