Sales tax is collected on almost all tangible personal property items at retail. This means that if you’re buying items with the intent of reselling them, you’re often able to avoid paying sales tax if you have a California resale certificate. This certificate lets you purchase products without paying sales tax until you sell the item to a personal consumer. If you purchase inventory without a resale certificate, you’ll have to pay sales tax on the initial purchase and after the final sale to your customer, which can be extremely costly and turn your thriving business into an unprofitable operation.
Acquiring a Certificate
There’s no application process to receive your certificate. Instead, the state offers a California resale certificate template that you can fill out from the comfort of your home. The single-page document doesn’t require much information. You’re expected to provide:
- A valid seller’s permit number
- Short description of the tangible property your company sells
- The vendor’s name you’re purchasing from
- Overview of the items you’re buying for resale
- The date of purchase and your signature
Penalties for Misusing a Resale Certificate
If you present a resale certificate while purchasing items, it’s very important that all the merchandise is only used for resale purposes. Improper use of a resale certificate can result in the following penalties:
- Having to pay tax on the item(s)
- Interest added on the tax you didn’t pay
- Cancellation of your sales tax permit
- A $500 penalty or 10 percent of the tax due, whichever is greater
- You could be subject to a 25 percent penalty for intent to evade sales tax or fraud
Retailers aren’t required to accept your resale certificate. For example, some major companies like Wal-Mart or Target have a policy against selling to resellers.
If you’re the one selling products, keep in mind that California is one of ten states that doesn’t accept resale certificates from other states. When selling products to someone claiming to be a reseller, verify that their paperwork clearly states their business type and identifying information. The company type should align with the products they’re buying. Someone who runs a toy store that’s claiming to buy TVs for resale should arouse your suspicion. The California Board of Equalization warns retailers to keep an eye out for fraudulent California resale certificates. If you’re about to do business with someone and have concerns about the validity of their certificate, you can verify the seller’s permit number online through the California Department of Tax and Fee Administration or via phone at 1-888-225-5263.