My business is a wholesaler of outdoor gear. We require our dealers to submit a resale certificate when they open an account with us. Many of them question the need to submit this form, and it's difficult to get the document from some of them. Can you please give me a good explanation for them? I would appreciate it. —C.M., Spokane, Wash.
The most basic explanation you can give is that if you're not in compliance on resale certificates, both you and your dealers could be in violation of state and local sales tax laws. Your company could be held liable for uncollected sales tax, penalties, and interest. And your customers could be exposed to 50 percent penalties on past due sales tax if they're not properly reporting that tax in Washington state.
If your clients don't understand this, their own legitimacy—and yours—could be called into question.
But let's start with some definitions. A resale certificate is a document that wholesalers such as your company must keep on file explaining why they are not charging sales tax on their transactions with retailers. The dealers, who claim sales tax exemptions in their transactions with you, are ostensibly collecting sales taxes from their customers—the end users—when they sell your equipment at the retail level.
In Case You're Audited
State and local sales tax laws require you to have these resale certificates on file. If your business is audited, you'll need to produce them. If you don't get a resale certificate from one of your customers, you are legally required to collect sales tax from them for the state where your equipment is delivered.
"Be sure to comply with your own state's process. In order for a certificate to be accepted in good faith by you, you must exercise care that the camping gear being sold is of a type normally sold wholesale by a buyer and then resold in the usual course of the buyer's business," says Bradford Hall, managing director of Hall & Company CPAs in Irvine, Calif.
If you're selling to a coffee shop or an automobile dealership, for instance, it's unlikely that those companies are buying tents and backpacks for resale. If you're aware of this, and you did not "exercise due care" over your sales, you could be liable for the uncollected sales tax.
If certain dealers are not providing you with resale certificates, it may be because they are not registered with their state's sales tax division and are selling illegally, Hall says, or they're buying equipment for their own use.
In either one of these cases, you should charge these customers sales tax until you get the required exemption certificate—period. You may lose some customers with a "no exceptions" policy, but they aren't the kinds of clients you want for your business in the first place.