In California, as in many states, companies purchasing items which will ultimately be resold to a final consumer in the ordinary course of business can purchase such items free of sales tax. The key is in the proper documentation both for the seller and the purchaser.
Example 1: California Company A sells Widgets to both end users and distributors. When it sells the Widgets to final consumers in California, it must collect and remit the proper amount of sales tax (state, county and city) from that consumer. However, when Company A sells the Widgets to a distributor in California that will ultimately resell the product, Company A can accept a properly executed resale certificate and then NOT charge sales tax. It is key that Company A is familiar with the distributor’s intent and that Company A truly accept the resale certificate in good faith. (If, for example, the distributor also is likely to use some of the Widgets in his side business, Company A should charge sales tax on sales of that product.) Most of the time, it will be clear that a distributor will be selling for resale, but not always. The acceptance in good faith is key for the seller. There are penalties for the illegal use of resale certificates.
Example 2: California Company B is a distributor of many electronic Gadgets, including Widgets. It purchases Widgets from Company A (above). Company B issues a resale certificate to Company A indicating that the company will ultimately resell the products to end consumers. Company A will likely accept the certificate in good faith and not charge sales tax. When Company B sells the Widget to the ultimate customer in California, the Company must charge the proper amount of sales tax.
What does the resale certificate look like?
Attached here is a sample copy of BOE Form 230: a resale certificate which notifies the seller that the purchaser will resell the items. The California State Board of Equalization (BOE) does not require that this particular form is completed, just that documentation is on file which includes the following:
- Signature of either the purchaser, purchaser’s employee, or authorized representative of the purchaser
- Name and address of the purchaser
- The number of seller’s permit held by the purchaser (if purchaser is required to hold one)
- A statement that the described property is being purchased for resale. The certificate must contain words that state the property will be “resold” or is “for resale”. Simply stating that something is “non-taxable” or “exempt” is not sufficient.
- Date of the document
- The signature of the purchaser or someone approved to act in their behalf.
In addition to the proper format, the seller must receive the purchaser’s resale certificate in a timely matter. This must be either a.) before the seller bills the purchaser for property, b.) at any time within the normal billing and payments cycle, or c.) at any time prior to the delivery of the property to the purchaser. In addition, the seller does not have to accept the certificate if they have reason to believe the property is being purchased for use other than resale. While there is no specific rule on how often to update this documentation, we recommend to our clients that resale certificates are updated at least annually.
If a purchaser has multiple transactions with a seller they can elect to use a blanket resale certificate noting that purchase orders should be reviewed for the exact quantities. These purchase orders must identify which items are for resale and those that are not, if applicable.
What about sales to out of state distributors?
If sales are made to out of state distributors, the seller will still generally want to collect a resale certificate.
Example 3: Company A (above) sells Widgets to out-of-state distributor, Company C for resale. Company A may likely still request a resale certificate from Company C to maintain in its records. As such, Company C should indicate on the resale certificate that the Company does not hold a California permit and the reason the permit is not required.
Remember, it’s all about maintaining proper documentation. In the case of an audit, the seller must maintain proper and organized documentation. This could be more difficult if they have a large or diverse customer base, so it’s important to maintain the data currently as indicated above. If the seller’s documentation is inadequate, or certain documents are missing or not thoroughly described, they could ultimately be liable for the sales tax.
Other recent “California (CA)” posts by Monika Miles, CPA:
- CA Board of Equalization: Changes to Sales-Use Tax Administration
- SaaS Taxation in California - An Overview
- CA District Taxes – Are You Calculating the Full Rate?
- Business Donations in CA: No Free Lunch When It Comes to Use Tax
- When Is Food Taxable in California?