When Buying From Wholesalers, Watch Your Taxes
By Cliff Ennico
www.creators.com
The following questions came up as I was interviewed last week on Product Sourcing Radio (
www.wsradio.com
), an Internet radio program hosted by executives of Worldwide Brands, Inc. in Orlando, Florida (
www.worldwidebrands.com
):
"We constantly tell online sellers that to buy from a genuine wholesaler, they need to have a state sales tax ID number. Why is this the case?"
Generally, there is no sales tax on wholesale purchases of inventory. A wholesaler needs evidence that you are not buying stuff for your personal use, and are required to charge you sales tax unless you deliver a "resale certificate" to them - basically, an affidavit swearing on your Great-grandmother's grave that you are buying stiff with the intent to resell it. You can find a copy of your state's Resale Certificate form at your state tax authority's website (to find it, go to
www.taxsites.com/state.html
), under the "Forms and Publications" link.
The resale certificate form will require you to provide the wholesaler with your state tax ID number (also commonly known as a "sales tax number" or "resale number"). You will need to obtain this from your state tax authority before you can legitimately buy goods at wholesale.
"What about states that don't have sales taxes? Maybe the retailer is in a state with no sales tax, but the wholesaler is. Or the retailer or wholesaler is in a state with no sales tax, but one of them has a presence in another state that has a sales tax. How can an e-tailer find out what they need for their own unique situation?"
Generally, sales tax must be collected by the "vendor" - in this case, the wholesaler. If the wholesaler is in a state with no sales tax, then they will not need to charge sales tax when selling to retailers anywhere in the world. If the wholesaler is in a state with a sales tax but is selling to an out-of-state retailer, the transaction is an "interstate sale" and therefore exempt from tax (at least under current law). However, the wholesaler may still ask for a Resale Certificate as proof that the out-of-state retailer is a legitimate business.
"If a wholesaler is in a state with no sales tax, what can a retailer do to verify that they are, in fact, dealing with a legitimate wholesaler?"
If the wholesaler is a corporation or limited liability company (LLC) - most will be - ask for a copy of their Certificate of Incorporation or Articles of Organization, with proof that the document was filed with the Secretary of State's office in the wholesaler's state. In most states, you can get this information online by searching the wholesaler's company name on the state Secretary of State's website. Checking the wholesaler's local Better Business Bureau or Chamber of Commerce website can't hurt, and you should always Google the company name to see what people on the Web are saying about them.
"A lot of e-commerce businesses use fulfillment houses to warehouse and ship their products to their customers. If your fulfillment house is in another state, then does your business have a presence or 'nexus' in that state for tax purposes?"
It depends on (1) who issues the invoice and (2) what address appears on the shipping labels. If you allow the fulfillment house to issue invoices under your name but with their shipping address for returned items, then you might well have a "nexus" in the state where the fulfillment house is located. Always, always, always use your own shipping labels and invoice forms when dealing with out-of-state fulfillment houses so this doesn't happen.
"Let's say that a retailer and a wholesaler are both in states with no sales tax. The wholesaler obviously will not need a sales tax ID number, but they will want proof that the retailer is a legitimate business. What kind of proof does the retailer need to provide?"
Most wholesalers will accept copies of any of the following:
if you are an LLC or corporation, your Certificate of Incorporation or Articles of Organization, with the confirmation of filing with your state Secretary of State's office;
the letter you received from the IRS awarding you your federal tax ID number; or
a DBA ("doing business as") certificate, with the confirmation of filing with your county or town clerk's office.
"What is a business license, and when does an online retailer need one?"
I'm not aware of any state that requires you to obtain a "license" just for the privilege of running a business (although you may need a license to sell certain goods or engage in certain professions). In many states, the term "business license" can refer to any of the following:
the DBA certificate you file with the county clerk's office;
the state "sales and use tax permit" that entitles you to collect sales taxes; or
in states with no sales tax, the document by which the state issues your state tax ID number.
Whether or not your state has a sales tax, you are required to register any new business with your state tax authority. The document you get back from the tax authority when you register is probably your "business license".
Cliff Ennico (
cennico@legalcareer.com
) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. His latest books are 'Small Business Survival Guide' (Adams Media, $12.95) and 'The eBay Seller's Tax and Legal Answer Book' (AMACOM, $19.95). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com
. COPYRIGHT 2007 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.
