Wednesday, May 20, 2009

The Resale Exemption

This is really almost not an exemption. That's because purchasing for resale is fundamental to the concept of sales and use taxes (SUT). SUT is usually a tax on the final consumer (or at least the transaction involving the final consumer). Since someone buying product to resell isn't, by definition, the final consumer, there shouldn't be any sales or use tax. Henceforth, the resale exemption.

If you buy something that you're going to sell to someone else, you shouldn't pay sales or use tax on it. You should provide your vendor with a resale certificate (that's what it's typically called). This gives your vendor reliable assurance that you're not to be taxed and why.

Then, when you sell your product, you must charge your customers tax and remit it to the appropriate state. Unless, of course, your customer is also buying for resale, in which case he/she needs to provide you with a resale certificate.

This is called the resale exemption. This is not absolutely universal, but it's pretty dang close. And it's really not an exemption like food, non-profit organizations, etc. It's fundamental to the entire concept of sales and use taxes.

There are variations on this rule. For example, in most states, real property construction contractors who buy building materials for their projects are considered the end users and are not buying for resale. Lessors, in most states, buy their property for resale because they will be charging the lessee tax on the rental or lease charges. And there are a few states where people, who provide taxable services, can buy some of their materials tax free using this exemption. Finally, the ingredients exemption for manufacturers, as well as the container exemption, are natural extensions of this exemption.

Sales Tax Guy
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Anonymous said...

I found your blog today while researching my question. Lots of helpful information! My question relates to the third paragraph from the bottom of this article, ie a reseller selling to another reseller, and not charging tax. What if a resellers sells to an organization in IL that has not quite achieved non-profit status but is tax exempt? This is a small recreational soccer league. It's kind of a weird situation. The organization is sales tax exempt and they have been for about 3 years but the paperwork for 5013c finally was done and sent in. Hopefully soon they will be officially non-profit. But since they are tax exempt, they should not be charged sales tax for their uniforms, correct? Is this type of situation one where no sales tax is collected on the goods?

Jim Frazier said...

The resale exemption has nothing to do with this. Non-profits may be exempt from sales tax, but not as a purchase for resale. AND, Illinois doesn't use the IRS exemptions. They have their own rules. And I'm not sure a sports league would qualify. You need to look at the Illinois web site to see if you qualify.

Remember, just because you have an IRS exemption doesn't mean that you state will grant you an exemption.