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by TaxJar December 2, 2024
At TaxJar, we’re often asked questions about how to get refunds of sales taxes paid to vendors or how to recover the tax that your business paid to vendors by passing the cost on to your customer. Both of these can be difficult questions to resolve because the rules can vary widely by state. Despite those obstacles, let me offer some thoughts on this issue.
The first question I normally ask people that call me on this issue is “Why are they charging you tax?” In most cases, the transactions involved are third-party drop shipments where the vendor has nexus in the ship-to state (and must charge tax) but the retailer (that’s most likely you in this scenario) does not have nexus or is not able to provide the vendor with a resale exemption certificate that is valid in the ship-to state. As such, the retailer is charged sales tax based on the rate in the ship-to state on the wholesale cost of the shipment. That’s even if you, as the retailer, are planning on reselling the products you bought and paid sales tax on.
The first step the retailer must take to avoid being charged tax is to provide their vendor with an exemption certificate that is valid in the ship to state. The validity of the certificate is based on the state law of the ‘ship-to’ state. Of the forty-six states (plus DC) that have a state level sales tax, thirty-five of those states will accept the certificate of the retailer’s ‘home state.’ (Here’s a list of states who won’t accept your out-of-state resale certificate .) Assuming that the retailer is registered in their home state, the first line of attack is to ensure that the retailer has provided their ‘home state’ resale certificate to their vendors to eliminate tax in those states.
In the 12 states that won’t accept the home state resale certificate, the retailer is confronted with two choices. The first choice is to register in some or all of these 12 states so that your company can provide a valid resale certificate. In most cases, the act of registering will require that the retailer charge and collect the tax on the full retail sales price of the product sold.
If the retailer cannot provide their vendor a resale certificate that is valid in the ship-to state, the vendor has no choice but to charge tax on their sale to the retailer. Once tax is charged the question arises on how to recover the tax. For this article I will address the effectiveness of three following methods.
In one discussion I had with a retailer on this issue, they told me that they were just going include the phrase ‘sales tax’ and include the amount of tax that their vendor had charged. I strongly warned them that just labeling the tax charged to them by their vendor as ‘sale tax’ gives the impression to customers and to the state that the retailer is ‘charging tax’ to the customer and not just passing on the tax that was charged to them by their vendor. If that conclusion is reached, the state will expect that your company remit the tax that appears to have been collected and could even pursue significant penalties for collecting and not remitting tax.
For retailers not registered for sales tax in the ship-to state where the vendor is charging sales tax, there is no 100% great way to recover sales tax charged by vendors. The retailer cannot file a refund claim and it cannot claim the tax charged on their return because they are not filing a return. One possible solution is to pass this tax on to the customer with a very clear indication on the invoice that the tax shown on the invoice is the tax charged to the retailer by their vendor. Even this method may not be acceptable in many states.
Depending on the amount of tax being charged to the retailer by their vendors, the retailer may need to evaluate the cost of registering and collecting the tax due against the amount of tax being charged to the retailer and possibly reducing the retailers profits.
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