Resellers: How to Recover Sales Tax Charged by Vendors
At Startxpress, we frequently receive questions about getting refunds on sales taxes paid to vendors or recovering those taxes by passing the cost to customers. These issues can be challenging due to varying state regulations. Despite these complexities, here are some insights on the matter.
Why is tax being charged?
The first question we usually ask people who us me about this issue is, “Why are they charging you tax?” Often, the transactions in question involve third-party drop shipments where the vendor has nexus in the ship-to state and must charge tax, but the retailer (likely you in this scenario) does not have nexus or cannot provide a valid resale exemption certificate for the ship-to state. Consequently, the retailer is charged sales tax based on the rate in the ship-to state on the wholesale cost of the shipment, even if the retailer plans to resell the products.
To avoid being charged tax, the retailer must provide the vendor with an exemption certificate valid in the ship-to state. The validity of the certificate depends on the state law of the ship-to state. Of the forty-six states (plus DC) with state-level sales tax, thirty-five will accept the retailer’s home state certificate. (Here’s a list of states that won’t accept out-of-state resale certificates.) If the retailer is registered in their home state, they should first ensure that they have provided their home state resale certificate to their vendors to eliminate tax in those states.
In the some states that won’t accept the home state resale certificate, the retailer has two options. The first option is to register in some or all of these states to provide a valid resale certificate. Registering typically requires the retailer to charge and collect tax on the full retail sales price of the products sold.
Sales tax recovery
If the retailer cannot provide their vendor with a resale certificate valid in the ship-to state, the vendor has no choice but to charge tax on the sale to the retailer. Once tax is charged, the question arises on how to recover it. This article addresses the effectiveness of three methods:
- File a refund claim with the “ship-to” state: To recover the taxes paid to the vendor, the retailer must prove that the tax charged was improper, typically by showing the purchase was for resale. However, if the retailer is not registered in the ship-to state, they cannot provide a valid resale certificate, which is crucial for a successful refund claim. Essentially, a refund claim will only be successful if the retailer registers in the state and provides their vendor with a resale certificate. Without that, the state will deny the refund claim.
- Claim a credit for tax on the sales tax return filed: This option is viable if the retailer is already registered with the state and is filing returns. If the retailer is registered, they should be able to provide their vendor with a resale certificate to avoid the tax from being charged initially.
- Include a line on the customer’s invoice for the tax paid to the vendor: Instead of absorbing the sales tax charged by the vendor as a cost of doing business, some retailers include a line on their invoice for “tax paid to vendor” to reimburse themselves for the tax paid. Typically, this tax is based on the wholesale price of the product sold, allowing the customer to determine the product’s cost. However, there is no valid way for the customer to verify that the tax shown on the invoice matches the tax charged by the vendor.
In a discussion with a retailer, they mentioned labeling the tax charged by their vendor as ‘sales tax’ on the invoice. We strongly advised against this, as it implies that the retailer is charging tax to the customer, not just passing on the tax charged by the vendor. If the state concludes that the retailer is collecting tax, they will expect the retailer to remit the tax and may impose significant penalties for collecting and not remitting it.
Conclusion
For retailers not registered for sales tax in the ship-to state where the vendor is charging sales tax, there is no foolproof method to recover the sales tax charged by vendors. The retailer cannot file a refund claim, nor can they claim the tax charged on their return since they are not filing a return in that state. One potential solution is to pass this tax on to the customer, clearly indicating on the invoice that the tax shown is the tax charged to the retailer by the vendor. However, this method may not be acceptable in many states.
Depending on the amount of tax being charged by vendors, retailers may need to assess the cost of registering and collecting the tax due against the amount of tax being charged and the potential impact on profits.
For further insights, explore the Startxpress Help Center and Blog. If you have questions or need support, reach out anytime at support@startxpress.io!
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