Hey, would you like to pay tax that you don't actually need to pay?
I'm guessing your answer is a big, fat "Nope." No one does, which is why if you're going to get into the retail business, you need a reseller's permit (also called a resale license, reseller's license, resale certificate or reseller's certificate, sales tax permit or sales tax ID).
If you're a US-based seller, you don't need to pay sales tax out of your own pocket for the products you're reselling to others. Your customers will pay it when they buy the product. You'll collect the money and send it to the state on a routine schedule.
A reseller's license is your flag saying "I sell to others. I can buy wholesale products without paying sales tax because I pass the tax onto my customers."
To get started, you need to find your state tax department. For example, someone based in New York would go to the New York State Department of Taxation and Finance (either online, by phone or in person) and fill in the appropriate form.
You'll find that when you've made your way to the right website, most of the information and forms you need are just waiting for you.
That's why I've got this nifty map to help you find your way faster:
Once you get your sales tax ID, the state will start sending you monthly/quarterly statements. In some cases, states will use your federal EIN as your sales tax ID. In some cases, they'll issue you a separate number.
Sales tax is a tax levied on all sales of physical goods to consumers within most states. Some states also charge sales tax for certain kinds of services.
Not all states charge sales tax: if you live in Delaware, Oregon, New Hampshire, Montana or Alaska, then sales tax either does not apply or applies only in certain circumstances. For sellers in any other state: yes, you do need to worry about sales tax!
You can find your state's sales tax rate here. It is important that you do this, because taxes vary significantly among the different states. For instance, some have one rate that applies state-wide, while in others, the rate varies between counties and cities.
Determining what state(s) you need to pay tax comes down to where you operate. A base of operations is called a "nexus." If you are dropshipping from home, you'll only be responsible for that state's sale tax because you only have one nexus. If you have a storage warehouse in another state, you have a nexus there, too. If you opt to ship goods via Fulfilled by Amazon, you technically have a nexus in whatever state(s) your goods are warehoused in.
Note: In some states you also need to collect sales tax on shipping and handling.
You can learn more about sales tax here.
There are a few other things to consider when looking into the taxes you'll be responsible for as a seller.
If you are a US citizen purchasing wholesale goods from a supplier within the US, then you will probably need a resale certificate or license from the state in which your business is located.
A resale certificate or license enables you to purchase goods wholesale without paying sales tax. It also allows you to collect sales tax from your customers, the end consumer.
Without a resale certificate, you will have to pay sales tax on the goods you buy wholesale and then also charge sales tax. In this case you can add the sales tax you paid as a deduction on your return, but it is much less complicated to just present your reseller's license when you buy.
Most wholesalers will ask to see a sales tax ID or reseller's license before they will sell you the goods. This is because they are legally obliged to check whether you are able to collect sales tax from the end user.
Another thing you may come across is something called "use tax." This tax is in place to discourage people from shopping in states with lower taxes than their own.
Use tax means that if you purchase goods in another state, you owe tax equal to the amount you would normally have paid in your own state. It will also apply to you if you buy goods intended for resale and then end up keeping them for your own use.
The good news is, if you are based in one state but ship to customers in another, you're not obligated to collect sales tax or deal with use tax at all. Just as you're responsible for paying the use tax if you get your supplies from out of state, your consumers are responsible for the use tax when they buy from you.
Obviously you could potentially get away without paying use tax because it works on an honor basis. However, should you be audited, use tax is something auditors like to hone in on. As a result, many new businesses get caught in the cross-hairs. Therefore it is wise to make sure that you pay it and keep the appropriate records.
The process for collecting sales tax will differ depending on where you're selling.
If you're selling on eBay, for example, you can learn how to collect sales tax on eBay here. The process basically looks like this:
If you're selling on your own online store, or if you're planning to in the future, things can get a little tricky if you're not careful!
The best thing to do in this case is hire an accountant, or use tax software such as Avalara to keep track of the sales tax you need to collect and pay.
If you create your own online shop with SaleHoo Stores, setting up your sales tax collection is automated and easy.
You need to keep your resale certificate(s) on file as part of your business records. You must be able to match your sales records with the certificates for audit purposes.
How often you need to complete Sales and Use Tax reports will depend on your monthly sales turnover and the state you are working from.
It's very important you are sure to collect the correct amount of sales tax, as you will be held liable for the difference if you come up short.
Note: Trading Assistants do not need to collect or remit sales tax.