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IDC Marketscape Report positions TaxJar as a 'Leader' in sales tax automation
Good news! When selling products wholesale, you generally do not have to worry about charging sales tax. (Therefore, when buying items at wholesale, you generally do not need to worry about paying sales tax.)
However, before you tear up your sales tax permit or use all that sales tax you didn’t pay to buy a pony, let’s dig into what’s going on with wholesale sales tax.
What does “wholesale” mean?
Selling wholesale is when a business sells goods to retailers in order for the retailer to sell the goods to end users at retail.
Wholesalers can be manufacturers, who make the goods on site and then sell them directly to retailers. Or, wholesalers can be “middle man” companies who buy directly from factories, distributors, or other sources and then resell them to retailers.
Wholesalers generally do not sell to the general public, though that isn’t always the case.
Why is there no sales tax on wholesale sales?
In the United States, sales tax is charged at the point of sale to the end user. (This is part of why sales tax is sometimes referred to as “sales and use tax.” See the difference between sales and use tax here.)
Wholesalers are not required to charge sales tax to retailers because when a wholesaler sells to a retailer, that retailer is not the product’s end user. Therefore, the wholesaler does not have to collect sales tax on the transaction when selling to a retailer.
Fun fact: The US sales tax system is different from the value added tax (VAT) used by many other countries around the world. Unlike sales tax, VAT is generally charged every step of the way, from when the manufacturer sells to the distributor, when the distributor sells to the wholesaler, when the wholesaler sells to the retailer, and when the retailer sells to the end user.
You can think of sales tax in the US as being a tax on a retail sale. While VAT is a tax on an item or transaction, following that item along its journey from manufacturer to distributor to retailer — to landing in the hands of the end user.
Sales Tax When Buying and Selling Wholesale
Wait, but we just said there are no sales taxes on wholesale sales!
While this is true, sales tax still needs to be addressed when purchasing or selling items at wholesale. Retailers who purchase products for resale without paying sales tax must provide a “resale certificate” (AKA a “reseller’s license”) to the wholesaler.
This document proves that the retailer is registered with the state’s taxing authority to collect sales tax. If a retailer fails to provide a resale certificate, a wholesaler can (and should) refuse to sell to them without also charging sales tax.
Many wholesalers only sell to retailers, so if a retailer can’t show a valid resale certificate, they may be refused service.
Fun fact: A resale certificate is often the very same document as a sales tax license, i.e. the state-issued document that shows you are legal to collect sales tax also shows that you are legal to buy items tax free at wholesale.
Here’s an example:
Riley Retailer purchases 50 pallets of paper towels from Williams Wholesale. Since Riley plans to sell the paper towels in their retail store, they do not need to pay sales tax on this purchase. But, in order for Williams Wholesale to be sure that Riley is a legitimate retailer, Riley must provide their resale certificate at the time of purchase.
Resale certificates are required simply to ensure that Riley Retailer isn’t really Sammy Scammer and trying to get away with buying items for personal use without paying sales tax.
Just like with everything sales tax related, resale certificates and the laws surrounding them vary by US state. Check out our “How to Use and Accept a Resale Certificate” post for more information.
Dropshipping from Suppliers and Sales Tax
Another situation in which sales tax might come into play in a wholesale situation is when a retail chooses to drop ship.
Drop shipping is when a retailer contracts with a third party, often a distributor or wholesaler, to send products directly to a buyer.
Here’s a common drop shipping business model:
Riley Retailer advertises and sells a fine selection of paper towels and napkins on their website. But, they only keep napkins in stock in their napkin warehouse. Whenever an order for paper towels comes in, they simply purchase the paper towels from their supplier, Debbie Dropshipper, and have Debbie actually ship the product from their own warehouse to the customer. (And remember, for sales tax purposes, the customer is the end user and is usually the person who has to pay sales tax.)
In this case there are three things going on:
- A customer buys the item from the Retailer
- The Retailer then buys the item from their Drop Shipper (Distributor, Wholesaler, Factory, etc.)
- The Drop Shipper then ships the item to the customer
In this case, if you are the retailer and your drop shipper has nexus in your state, they’ll be required to charge your sales tax on that purchase unless you present them with a resale certificate stating that the item you bought from them is legitimately for resale.
And if your customer is in a state where you have sales tax nexus, then you’ll be required to charge sales tax to your customer.
In other words, if you, a retailer, have a resale certificate, you should not be charged sales tax by your drop shipper. But, you still need to have and present a resale certificate in order to buy items tax free at wholesale from your drop shipper and have your drop shipper ship those items to your customer.
Drop shipping and sales tax is it’s own complex can of worms and you can read more about drop shipping and sales tax here.
I hope this has helped answer any questions you have about wholesale sales and sales tax. If another question springs to mind, start the conversation in the comments!
Ready to automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.