Initiating a business, you will not only have to set up some sort of entity, whether incorporated or not, but also you’ll have to observe quite a number of government rules and regulations to run your business eligibly and lawfully. Subject to the entity structure, type of activities, and industry, nearly all businesses in the US are to have some sort of business license in place. Business licenses and permits are sorts of registration certificates enabling your company to operate in a certain jurisdiction or provide certain types of services and products. Since commercial operations are the most common ones, a seller’s license and a reseller’s permit are two terms known to anyone engaged in sales. Here, we are going to talk about the latter. What is a reseller permit? What benefits does it bring to its holder? And how to get this permit? Keep on reading and you’ll find out.
Reseller Permit: Definition
As the name suggests, a reseller’s permit, reseller’s license, resale license, resale certificate, or a sales tax permit as they call it, is a special permitting document issued for retailers and wholesalers to buy goods, products, or items for further resale without paying a sales tax on them. Likewise, this type of certificate is also available for some manufacturers who can purchase some ingredients, components, or elements from suppliers to produce new items. And those purchases will be also free from sales tax payments. In a word, a reseller license provides a sales tax-exempt status to businesses engaged in resale activities.
Normally, reseller’s permits are issued for a period of four years. However, contractors, newly-formed ventures “younger” than 12 months, and companies that have faced some reporting and filing issues within the recent 12 months get a resale certificate that will expire in two years. Besides, if you maintain trading operations across the states, you might need to get a reseller’s license in each of those states or register an out-of-state permit valid in 40 US states.
How to Use a Reseller’s License?
First and foremost, both as a vendor and as a buyer, you need to clearly understand the difference between a seller’s permit and a reseller’s permit or a resale certificate. The biggest mistake of many commercial entities is that they don’t distinguish between those two documents and often consider them the same. Yet, a seller’s permit enables entities selling any tangible items, articles, and property to the public to collect sales taxes. Meanwhile, a resale certificate gives an opportunity to avoid sales taxes to companies purchasing goods for a resale. Thus, a seller’s license holder acting as a vendor and sales tax collector in one transaction can appear as a sales tax-exempt purchaser in another transaction. More than that, to get a resale certificate, you need to have a seller’s license in some state that will prove your eligible seller’s status and let you buy the good tax-free.
With that, to properly use a reseller’s permit, a purchaser should provide a copy of this document to the vendor when performing a purchase. A vendor, in turn, should request a resale certificate if the buyer claims a tax-free purchase. Besides, when accepting a reseller’s permit, it’s a wholesale vendor who is responsible for:
- Checking the document validity and appropriateness;
- Making sure this permit is applicable in the state of purchase;
- Ensuring the certificate has the right form and is filled in correctly;
- Keeping an eye on false and fraudulent documents.
Why a vendor should do all this you wonder? Since it’s the vendor that is held liable for incorrectly collected sales taxes.
When it comes to the buyers, their responsibility is to maintain duly registered and approved resale certificates and apply those certificates exclusively to the items and services meant for a resale. Meanwhile, when reselling those products to their own customers, they should collect local sales taxes.
Though resale certificate requirements might slightly vary by state, by and large, they are common nationwide. So, you can use this certificate to purchase:
- Any merchandise and goods you won’t use for yourself and resale straight away;
- Components and materials that will be used to produce some items or products for sale;
- Produce used in farming and agriculture for seeding and growing crops;
- Building materials and contract services for construction when those buildings and premises are to be sold.
Reseller’s Permit Misuse
Resale certificates allow their owners to save on taxes, it’s a fact. However, reseller’s license holders often tend to misuse it, either unintentionally or within some fraudulent schemes. Whatever the reason, should the case of misuse become evident, it will result in severe penalties for the license holder and can cause immediate resale certificate revocation. More thant that, unpaid taxes will have to be settled in full.
To avoid a reseller’s permit misuse, remember that this document doesn’t cover the purchase of:
- Products for personal use;
- Items you are going to give as a present or gift;
- Business supplies and any materials to be directly used for running business activities;
- Tools and equipment unless you resale them;
- Materials and services to deliver to the government or public contracts.
Difference Between a Reseller’s Permit and a Business License
To better understand the difference between these two licenses, it’s worth mentioning that they belong to different spheres and are applied at different levels. Thus, business licenses are applied to all business entities enabling them to operate within a certain territory or industry or provide certain types of services. Meanwhile, reseller’s permits are available not to all businesses but only to certain ventures engaged in resale. In other words, to get a resale certificate or reseller’s permit, your company should qualify for it while a business license is a requirement itself.
Technically, a business license is rather a generic name embracing a whole number of more specific subtypes. From this point of view, a reseller’s permit is one of those special subtypes. The term “business license” covers any common and special permits a business might need. And a reseller’s permit is something applied only to specific business situations.
Applying for a Reseller’s Permit
Straight off the reel, a resale certificate or reseller’s permit is one of the most affordable business licenses. While other licenses incur a registration fee from $50 to about $400, a reseller’s permit comes either at a symbolic fee or free of charge. Besides, qualifying entities will be issued a reseller’s permit automatically. Otherwise, you’ll have to apply for it.
However, before starting the application process, you need to make sure your firm is eligible in the jurisdiction where you register a resale certificate. It means if you apply outside your home state, you’ll have to get a foreign qualification first. Once you understand all ins and outs of the status you’ll get with the resale certificate and you are sure your form qualifies for tax-exempt status, other basic registration steps are as follows:
- Get an application form from an appropriate government agency in your state. It could be the Department of Revenue or a tax controlling body, etc.;
- Fill in the form with the required information. Apart from your personal data, you might need to specify your tax ID, describe your business structure, mention your average business sales turnover, and other essential details;
- Submit a completed form to the authority you’ve got it from along with a registration fee if it’s applicable;
- Check for a renewal date to consistently maintain a valid permit.