But, they only keep napkins in stock in their napkin warehouse. Riley Retailer advertises and sells a fine selection of paper towels and napkins on their website. Here’s a common drop shipping business model: Dropshipping from Suppliers and Sales TaxĪnother situation in which sales tax might come into play in a wholesale situation is when a retail chooses to drop ship.ĭrop shipping is when a retailer contracts with a third party, often a distributor or wholesaler, to send products directly to a buyer. Check out our “ How to Use and Accept a Resale Certificate ” post for more information. Just like with everything sales tax related, resale certificates and the laws surrounding them vary by US state. 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. 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. Since Riley plans to sell the paper towels in their retail store, they do not need to pay sales tax on this purchase. Riley Retailer purchases 50 pallets of paper towels from Williams Wholesale. 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. Many wholesalers only sell to retailers, so if a retailer can’t show a valid resale certificate, they may be refused service.įun fact: A resale certificate is often the very same document as a sales tax permit, i.e. If a retailer fails to provide a resale certificate, a wholesaler can (and should) refuse to sell to them without also charging sales tax. This document proves that the retailer is registered with the state’s taxing authority to collect sales tax. Retailers who purchase products for resale without paying sales tax must provide a “ resale certificate ” (AKA a “reseller’s license”) to the wholesaler. While this is true, sales tax still needs to be addressed when purchasing or selling items at wholesale. Wait, but we just said there are no sales taxes on wholesale sales! Sales Tax When Buying and Selling Wholesale 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. You can think of sales tax in the US as being a tax on a retail sale. 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. Therefore, the wholesaler does not have to collect sales tax on the transaction when selling to a retailer.įun fact: The US sales tax system is different from the value added tax (VAT) used by many other countries around the world. 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. (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. In the United States, sales tax is charged at the point of sale to the end user. Why is there no sales tax on wholesale sales? Wholesalers generally do not sell to the general public, though that isn’t always the case. Or, wholesalers can be “middle man” companies who buy directly from factories, distributors, or other sources and then resell them to retailers. Wholesalers can be manufacturers, who make the goods on site and then sell them directly to retailers. Selling wholesale is when a business sells goods to retailers in order for the retailer to sell the goods to end users at retail. However, before you tear up your sales tax permit, let’s dig into what’s going on with wholesale sales tax. (Therefore, when buying items at wholesale, you generally do not need to worry about paying sales tax. When selling products wholesale, you generally do not have to worry about charging sales tax.
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