What Is an Out-of-State Resale Certificate and How Does It Work?

Do you find yourself confused about which resale certificate to use when buying items for resale in other states? For example, can you use your New York resale certificate in California?

Most states accept out-of-state resale certificates, but some don't. You must be aware of this to avoid any hassles when buying items for resale outside of your home state.

What Is an Out-of-State Resale Certificate?

A resale certificate is a legal document that allows businesses to purchase goods intended for resale without paying sales tax at the point of purchase. The idea is that sales tax will be collected when the final consumer purchases the product, not during the intermediary sale between the supplier and the retailer.

When a business provides a resale certificate to a vendor, it certifies that the items bought are for resale, not personal or business use. This allows the business to avoid double taxation, ensuring that sales tax is only applied to the end consumer.

In out-of-state transactions, a resale certificate can be used to purchase items tax-free even if the seller is located in a different state than the buyer. So, an out-of-state resale certificate allows businesses to purchase goods tax-free for resale when the seller is in a different state from where the buyer is registered.

This is crucial for businesses that operate across state lines, as it prevents double taxation and ensures smoother interstate transactions. Out-of-state resale certificates are usually used in the following scenarios:

• Drop Shipping: When a third-party vendor ships products directly to the customer, and the purchase is made out-of-state.
• Inventory Purchases Across States: If you operate in multiple states and buy inventory outside your primary business location.
• Trade Shows or Pop-Up Shops: If you temporarily sell products in another state.

However, the rules for accepting out-of-state resale certificates vary by state:

• Some states allow universal resale certificates, which can be accepted regardless of the buyer's business location.
• Other states require specific documentation or may not accept out-of-state certificates at all.
• Businesses may need to register for a sales tax permit in the state where they are making purchases.

Here's a table differentiating in-state and out-of-state resale certificates.

Criteria	In-State Resale Certificate	Out-of-State Resale Certificate
Validity	Valid only within the state of business registration.	Valid across state lines depending on acceptance policies.
Acceptance	Always accepted by vendors in the same state.	Acceptance varies by state; some states may require extra steps.
Registration Requirement	Only state-level business registration is required.	Some states require foreign entity registration or a tax permit.
Documentation Needed	Simple state-issued form for tax exemption.	May require multi-state form or state-specific documentation.
Tax Obligation	No sales tax is charged for purchases for resale.	No tax charged if accepted, but compliance is stricter.
Audit Risk	Audits typically focus on in-state transactions.	Higher audit risk due to multi-jurisdictional sales.

How Does an Out-of-State Resale Certificate Work?

Suppose a boutique clothing store in Arizona wants to buy wholesale dresses from a supplier in Nevada. The Arizona store provides an Arizona Resale Certificate to the Nevada supplier. Nevada accepts out-of-state resale certificates, so the store does not have to pay Nevada's sales tax. The tax obligation only kicks in when the boutique sells the dresses to the final customer in Arizona.

When a state does not accept an out-of-state resale certificate, simply presenting your resale certificate from another state won't allow you to make tax-exempt purchases in that state.

For instance, a business in New York purchasing from a supplier in California may need to fill out a California-specific resale form even if they have a New York certificate.

However, there are specific steps you can take to achieve compliance and potentially avoid paying sales tax upfront. This will be covered in the next section.

How to Obtain an Out-of-State Resale Certificate

Here are some things to do when purchasing in a state that does not accept out-of-state resale certificates.

1. Register for a Sales Tax Permit. Register with the state's Department of Revenue. Apply for a sales tax permit in that state to qualify for resale tax exemptions.
2. Fill Out a Resale Certificate Form. This is a state-specific form detailing the business registration, address, and nature of purchase.
3. Present the Certificate to the Vendor. The vendor will verify the signed certificate to justify the tax-exempt purchase.
4. Keep the Document. States often require merchants to retain copies of resale certificates for audit purposes. So, make sure to keep them.

Which States Do Not Accept Out-of-State Resale Certificates?

Most states accept out-of-state resale certificates. However, there are 10 that do not. These states typically require sellers to register and obtain a sales tax permit within their state if they want to make tax-exempt purchases, even if the transaction is intended for resale.

State	Requirement
Alabama	Requires registration for a sales tax permit to purchase items in-state tax free for resale.
California	Requires you to register for a California sales tax permit.
Florida	Requires you to apply for a Florida sales tax permit to issue a valid resale certificate.
Hawaii	Requires a Hawaii-specific General Excise Tax License.
Illinois	Requires you to register for an Illinois sales tax permit.
Louisiana	Requires you to register for a Louisiana sales tax permit.
Maryland	Requires you to register for a Maryland sales tax permit.
Massachusetts	Requires you to register for an Massachusetts sales tax permit.
New Mexico	Requires you to complete Multistate Tax Commission’s Multijurisdictional Sales and Use Tax Certificate or Border States Uniform Sale for Resale Certificates ( BSCs).
Washington	Requires you to apply for a Washington sales tax permit to issue a valid in-state resale certificate.

What Happens If You Misuse an Out-of-State Resale Certificate?

An out-of-state resale certificate allows businesses to purchase goods without paying sales tax if those goods are intended for resale. However, misuse of this certificate—whether intentional or accidental—can lead to serious consequences.

Misuse occurs when a business uses the resale certificate for transactions that are not eligible for tax exemption such as the cases below:

• Purchasing items for personal use
• Buying office supplies, equipment, or other non-resale items tax-free
• Using an out-of-state certificate in states where it is not accepted
• Falsifying information on the resale certificate form

Consequences

Misusing resale certificates could result in the following:

Fines and Penalties

States impose substantial fines for improper use of resale certificates. This could range from a fixed amount per transaction to percentage of the transaction value.

In California, misuse can lead to penalties up to 10% of the tax amount due, in addition to the unpaid tax itself. And repeat offenses may result in escalated penalties.

Back Taxes Payment With Interest

Businesses that misused resale certificates maybe liable for back taxes on all unauthorized purchases. States often add interest on top of the back taxes owed.

For example, a business improperly claimed $100,000 worth of purchases tax-free. It may have to pay the sales tax rate of the state plus interest, which may total to thousands of dollars.

Risk of State Audits

Misuse of resale certificate could trigger state audits, which can be costly. During an audit, business must provide proof that all tax-exempt purchases were for resale.

Incorrect, fraudulent or missing documentation increases the risk of additional fines and legal scrutiny. Among the high-risk states for audits are California, Texas, New York, and Florida.

Revocation of Sales Tax Permits

Repeated misuse of resale certificates can lead to the revocation of sales tax permit. When this happens, the business has to reapply and potentially go through stricter compliance checks.

Criminal Charges for Fraudulent Use

When there’s evidence of intent to defraud the state of sales tax revenue, the states may pursue criminal charges. This can result in fines over $10,000 and jail time for severe cases. In addition to that, it will taint the business reputation.

Tips to Avoid Misuse

Here are practical tips to keep your business safe from misusing resale certificates.

1. Understand State Regulations: Always verify the requirements for each state where you do business.
2. Keep Accurate Records: Document every purchase made with a resale certificate.
3. Separate Personal and Business Purchases: Never use a resale certificate for non-resale items.
4. Renew and Update Information: Ensure that your resale certificates are always up to date.
5. Train Your Team: Educate employees involved in purchasing about proper use and compliance.

Streamlining Interstate Commerce with Resale Certificates

Here are the points to remember when dealing with out-of-state resale certificates:

• It Allows Tax-Free Purchases Across State Lines: An out-of-state resale certificate permits businesses to buy goods without paying sales tax if the products are intended for resale, even if the supplier is in a different state.
• State Acceptance Varies: Not all states accept out-of-state resale certificates. Some require you to register as a foreign entity and obtain a local sales tax permit to make tax-exempt purchases.
• Compliance and Record-Keeping Are Crucial: Businesses must maintain proper documentation, keep copies of resale certificates, and ensure they are used strictly for resale purposes to avoid fines and audits.
• Misuse Can Lead to Severe Penalties: Improperly using a resale certificate—such as for personal purchases or in non-accepting states—can result in back taxes, interest, hefty fines, and potential criminal charges.

Understanding interstate commerce laws is crucial for businesses that operate across state lines, as it ensures compliance with varying sales tax regulations and prevents costly fines, penalties, and audits. Using solutions like Kintsugi sales tax automation software can simplify multi-state tax calculations, maintain up-to-date compliance, and streamline the process of managing out-of-state resale certificates effectively.