Do You Qualify for a Sales Tax Exemption?

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0:49 What exemption means

Okay, so now let's dive into the content. So when it comes to exemption, it really just means certain transactions, certain products, and certain customers, certain purchases, you either don't have to charge sales tax for, or you don't have to pay sales tax for.

And I want to divide up the next part of the video into two separate parts. So I want to talk about the selling side and the buying side as an ecommerce business owner, to help you understand what kind of exemptions apply in both scenarios. So let's talk about the selling side first, because that's the main part of your business.

1:31 Selling side, three types of exemption

When it comes to selling products, there are three types of exemptions that are available for sales tax purposes.

So the first one is if the product itself is not taxable. And there are lots of products that aren't taxable in a lot of states. If you sell clothing, if you sell supplements, if you sell food, if you're in the manufacturing business, a lot of your products might not be taxable in a lot of states. So on these products you just don't need to charge any sales tax at all. And you can configure that setting. Like if it's on Shopify, then you can create a collection for these products, and in certain states mark those collections to collect zero tax percent.

So that's the first one, which is product itself is not taxable. And for this type of exemption, you don't need to have any documentation to prove that they are not taxable, because they're already in the legislation.

2:39

So the second type is if the customer is exempt. This usually applies to schools, government entities, and charitable organizations. So if you sell your products to these exempt entities, don't charge sales tax on the transactions. And in this scenario, they do have to provide you with their valid exemption certificate, telling you that "you shouldn't charge me sales tax." So that's the second one, is the customer type.

The third type where you don't have to charge sales tax when you sell products is when the transaction itself is a wholesale retail situation. Meaning if you're selling your products to a wholesaler, to a distributor, who will eventually sell the products again to the end consumer, then the sales tax collection responsibility falls on the retailer instead of you. And this scenario requires a resale certificate from the wholesaler or the distributor.

3:49

So just to recap really quick on the selling side of things, three types of exemptions are available. Product exemption, don't need documents. Entity exemption for the consumer, yes, need documents. And if you're selling to a wholesaler or distributor, they need to provide you with a valid resale certificate.

4:14 Buying side and drop shipping

Now let's talk about the buying side of things. So when you purchase supplies, when you purchase any inventory, or if you are drop shipping, so the transaction between you and the drop shipper, this is the transaction we're talking about.

They shouldn't be charging you sales tax, because you are collecting sales tax from your customers if you have nexus where the customer is. So the transaction between you and the drop shipper should be tax free. And this is when you should provide a valid resale exemption to your supplier, so then they wouldn't charge you sales tax on your purchases.

5:01 Where to get resale certificates

So let's talk about how, or where do you get these resale certificates, or just exemption certificates in general.

So a lot of the time for your home state, if your supplier is in the same state as you, if you already have a tax ID in your home state, then you can just log into your home state's website and you can download a resale certificate that already has your information, and you just fill in the blanks for, these are the products that I'm selling, this is the specific supplier, put in their information, and send that to them.

5:44

It's tricky when the supplier lives in a different state than you, so your tax ID is from a different state than where the supplier resides in. So in this scenario, there are two general forms that you can still put in your home state tax ID on the form. One is called the multi-state tax committee and one is called streamlined sales tax. And I'll link these forms below.

So a lot of the states, I would say most of the states, like 80% of the states, will accept one of these two forms. And you can still use your home state's tax ID and fill out the form, put in the supplier's information and give it to the supplier, and they should accept it.

6:40

But there are a handful of states, I think it's less than 10, but California's one of them, Hawaii is one of them, I think Connecticut might be one of them as well, that they actually either require you to go into their website and fill out their form, or like California, they require you to have a California tax ID to make the resale certificate valid. So this is when you have to apply to California for a sales tax ID just to get a resale certificate to your supplier, so you don't have to pay sales tax.

So if you are in the majority of the states that accept one of those two general forms, that's great, and I hope that's you. But if you're in one of the more difficult states that are not on the general forms, please reach out to us with your specific situation, and I can point you in the right direction of what specific form that you need to fill out to get your resale exemption, so you don't have to pay sales tax to your drop shippers or your suppliers.

7:56 Where to get help

Okay, so that's a lot of information. If you need additional help, we also have the white paper linked underneath about 10 Steps to Ensure Sales Tax Doesn't Burn Down Your Business. We just updated it for 2021, so all the information should be very relevant.

And if you sell over a million a year and you need some professional help, this is when you can come to LedgerGurus and we're happy to take on your sales tax services.

As always, please comment with any questions, and I am always available to answer general questions. Or if you want to book a one hour consulting session with me, that'd be great too. I'll do my best to help you get peace of mind with sales tax.

That's all for today. Thank you so much for joining me and have a good day.