Sales Tax for Wholesale Sellers: Handling Sales Tax, Resale, and Exemption Certificates
Updated Aug. 2023
When you start selling wholesale, many makers, product sellers, and independent product companies have the uncomfortable feeling that there is something more official you should be doing to start. And as you get farther down the road, it may dawn on you that you’re really doing this wholesale thing and need to get things correct before going any farther.
In this article, you’ll learn:
How taxes work with wholesaling.
Whether you need a wholesale license to sell to stores.
What documentation you need (resale certificates, exemption certificates, etc) on retailers that order from you?
What you need to collect or verify the EINs of stores that place wholesale orders with me.
Whether you need a license to sell wholesale.
Overall: what the legal and tax requirements are, in selling wholesale.
Sales Tax for Regular Retail Sales
As a product company, you already know how sales tax works for regular “retail” sales. For instance, in New York State (where we’re based), you apply for a free New York sales tax permit (which in New York is called a Certificate of Authority). Then, you collect sales tax on each sale to customers in NY. Finally, you submit a sales tax return and payment monthly, quarterly, or annually (depending how much tax you have collected.) If you also have physical presence (an employee, a warehouse, or other qualifying “presence”) in other states — and meet their sales tax threshold — you may also need to collect and remit sales tax for sales in those states, too. If you need help with this, this article from Tax Jar is quite comprehensive and clear.
But when it comes to wholesale sales, things change a bit. So in this article, we’re going to share a full rundown of what to expect when it comes to sales tax, resale, and make sure you don’t do something now that you’ll regret later.
Why Sales Tax Is So Important to Handle Correctly
Handling sales tax correctly is an especially serious part of running your business because the penalties and consequences of not handling it well are serious.
If you are audited and found to not have paid sales taxes that you owed, you will have to:
Pay for past-due sales tax out of your own pocket, since you didn’t collect it from customers.
Pay penalties and interest. The penalties vary by state but average about 30% of the amount of sales tax due.
Pay sales tax owed, even if your business has subsequently closed. Sales tax is what is called a “trust tax”, meaning that in many situations, you (the business owner) is personally liable for the tax.
That’s why it’s so crucial to make sure that your wholesale sales are truly exempt from sales tax – AND that you have the documentation to prove it. In an audit, the burden of proof is on you. So if you can’t prove that a sale was exempt from sales tax, the auditor will assume that sales tax should have been collected (and the above penalties will apply.)
How Sales Tax Works for Wholesale Sales to Stores
If you are a maker or independent product company selling wholesale, you do not need to charge sales tax to shops who buy from you. Sales tax is charged to the end consumer of a good.
For instance, if you are a jewelry maker and sell your line to a local shop so they can resell it to local people, you don’t need to collect sales tax from that store. The shop needs to collect sales tax from the people buying the actual jewelry pieces (the end user) and remit it to the state.
What Documentation Is Needed for Wholesale Sales
Since you’re not collecting sales tax on wholesale sales, you need to prove that it was correct that you didn’t.
You don’t need to collect documentation on every wholesale sale, however. But to know which stores you need documentation on, you’ll need to know about “physical presence” or nexus.
You are responsible for collecting appropriate sales tax in states where you have physical presence or nexus and where you meet the sales threshold (if applicable). This article is a great overview of what this means and gives you specifics state-by-state (since the requirements vary.) The most important part is:
The most common form of physical presence in a state is a brick-and-mortar location or storefront, but may also include physical presence through employee activities, payroll, property, performance of services, or trade show attendance… Any activity a state considers related to physical presence still establishes nexus and results in the requirement to register, collect, and remit sales tax to the appropriate tax jurisdiction. Not fulfilling this obligation results in non-compliance.
So your first step is to think about which states might have physical presence in – and double check what their requirements are to establish physical presence.
Then, you need to figure out what documentation is required for which sales:
For wholesale sales that are NOT in a state where you have physical presence, you wouldn’t owe sales tax even with a retail sale, so you DON’T need to request or maintain exemption certificates for wholesale sales in that state. No documentation is required for those sales.
For wholesale sales that ARE in a state where you have physical presence and where you meet the sales threshold (if applicable), you would owe sales tax with a retail sale, so you DO need to request or maintain exemption certificates for wholesale sales in that state.
Here’s an example:
Let’s say you have a stationery line based in NY and have a part-time employee who does customer service for you in Alabama. You also attend a yearly wholesale trade show in Texas. Other than that, all of your markets, trade shows, and other activities happen in NY. In that case, you would need to do the following to handle sales tax correctly:
Since you have an employee in Alabama, you’d check the physical presence requirements there. Alabama does count an employee as establishing a physical presence in the state. You'd also check if you meet the sales threshold in that state. Let's say that you do. Then, you’d check whether exemption certificates are required for resellers in Alabama. They are. So you would need to collect a sales tax exemption certificate when you make a wholesale sale to any shop in Alabama, using Alabama’s exemption certificate.
Because you go to a trade show in Texas, you’d check the physical presence requirements there. Texas does count a trade show as establishing a physical presence in the state (for any year you attend that trade show.) Next, you'd check if you meet the sales threshold in that state. Let's say that you do. Then, you’d check whether exemption certificates are required for resellers in Texas. They are. So you would need to collect a sales tax exemption certificate when you make a wholesale sale to any shop in Texas, using Texas’s exemption certificate.
For all other wholesale sales (outside of AL, NY, and Texas), you don’t need to collect sales tax exemption certificates.
Two notes:
All of the above works the same with distributors if they are purchasing product from you for resale.
You probably notice that in many states, the sales threshold is quite high. So that means that for many makers and independent product lines, the only states where you’ll actually need to maintain exemption certificates is in the state where you are based. But these rules change and evolve — and vary a lot state-by-state — so do your research to confirm those thresholds.
Do you need a license to sell wholesale?
Usually: no.
Usually, the permit or certificate you need is to buy goods wholesale and then resell them (that’s the exemption certificate we’ve discussed here.) Generally, to start selling wholesale, you just need to… start selling. The minute you sell something wholesale, you’re categorized as a Sole Proprietorship — and are thus officially a wholesaler.
There are some laws that vary, however in specific states, counties, and cities, so double check just to be sure. But generally, the above principle is correct regardless of your location.
How Sales Tax Works With Wholesale Marketplaces Like Faire
Marketplaces like Amazon, Faire, and Etsy, have often been a bit of a fuzzy area when it comes to collecting taxes. Faire, Tundra, Abound and the rest DO verify that buyers have a resale ID and/or certificate. But they don’t pass that documentation on to sellers. And as of January 2023, online marketplaces have the ability to report business transactions to the IRS for amounts as small as $600.
There could be an argument that you’d be responsible for showing documentation that wholesale sales via marketplaces were correctly exempted.
That said, there was a recent regulatory shift that makes this much easier. Recently, 30+ states have adopted marketplace facilitator laws that put the burden of sales tax collection entirely on the marketplace. That means that you’re definitely not required to maintain exemption certificates for sales in those states.
In theory, if you made a wholesale sale in a state where you DO have a physical presence AND they require exemption certificates AND they do not have marketplace facilitator laws THEN it’s possible you’d be required to have exemption certificate on file for that buyer. But in practice, very few sellers work to achieve that level of rigor in the documentation – they don’t worry about pursuing exemption certificates for sales on a wholesale marketplace.
How to Handle Communication With Stores Around Sales Tax Exemption
The best time to collect exemption certificates for each shop is likely when they place their order, alongside their shipping address and credit card number. Make sure to request it clearly on the invoice itself and send a friendly reminder if they don’t send it along.
Once you figure out which states you need exemption certificates for, add that information to your wholesale terms. You might say something friendly but specific, like: “We are required to collect Sales Tax Exemption Certificates in New York, Alabama, and Texas for any wholesale sales that are direct to us (not on Faire or another marketplace). If you’re in one of those states, we’ll ask you to include that certificate with your first order and payment so we can stay safe with the tax folks!”
How to Keep Records Around Sales Tax Exemption for Wholesale Sales
A few tips around record keeping here:
Keep a copy of each required exemption certificate somewhere backed-up and easily accessible (for instance, we use Google Drive for documents like this).
In most states, exemption certificates for wholesale sales do not expire. Some people suggest requesting updated certificates every 3-4 years (in case something changed) but for brick-and-mortar shops, that may not be necessary.
For each wholesale order, you might want to make a note of each of the following so that you don’t have to retrace every step of your thinking in the case of an audit (or to double-check yourself). You could add a field to your CRM or your spreadsheet that is named something like “Sales Tax Exemption Status” and you’d choose one of the following options:
Marketplace sale (no certificate required)
Sale In State Without Physical Presence (no certificate required)
Sale In State With Physical Presence and Certificate Required (certificate on file)
Sale In State With Physical Presence but NO Certificate Required (no certificate required)
Regulatory issues and paperwork are not the most fun part of running a business, it’s true. But there is freedom to be found in having clarity on the right way to do things, and keeping everything up-to-snuff. Wishing you that clarity and that freedom as you move forward.
How We Can Help You Grow Wholesale:
Wholesale In a Box
Our beloved comprehensive course and coaching is your all-in-one way to grow wholesale fast, steady, and long-term. Learn more here.
Getting Started With Wholesale
A free 4-part email course covering the basics of how wholesale works, keys for success, whether it’s right for you, and how to get started. Sign up here.
The Wholesale Reset
Our free email course for more advanced brands — we’ll help you reset your approach to wholesale and take concrete steps forward to change your results. Sign up here.
This article is based on consultations with the Wholesale In a Box CPA team, extensive state-by-state research, and experience as a business advisor for the United States Small Business Development Center. We certainly hope and expect you’ll find this information helpful, correct, and thorough. That said, this guide does not offer a substitute for professional legal or tax advice. If you have questions about your tax liability or concerns about compliance, please consult your qualified legal, tax, or accounting professional. This information was compiled in July 2022. Also: because states may update and amend their sales and use tax laws, see each state’s tax authority website for the most up-to-date and comprehensive information.