At audit, the state asks the seller for the resale certificate. Not the buyer.
Selling wholesale tax-free because "they said they were a reseller" leaves the seller holding the tax. What the certificate is, whose file it belongs in, and when it stops working.
A US brand sells to a retailer without charging sales tax, because the retailer is going to resell the goods and sales tax is collected at retail. That is correct, and it is the whole basis of wholesale. What most first-time brands miss is that the exemption is not a fact about the buyer. It is a document, and the party that has to produce that document at audit is the seller.
The exemption belongs to the document
A resale certificate is a form the buyer signs stating that the goods are being purchased for resale, with the buyer's sales tax permit number on it. When the seller has a valid one on file, the sale is exempt. When the seller does not, the sale was taxable, whatever the buyer intended.
The state does not audit the retailer to check whether it resold your goods. It audits you, asks for the certificate covering each exempt sale, and assesses tax on every sale you cannot cover. "They told me they were a reseller" is not a defence. Neither is a business card, a store name, or an order for two hundred units.
Three ways a certificate stops working
Even a brand that collects certificates can find them worthless at audit.
- It expired. Some states issue certificates that lapse, and an expired certificate covers nothing after its date.
- It is for the wrong state. A certificate is issued by a state and covers sales into that state's jurisdiction. A buyer in one state handing you a certificate from another, because that is where their permit is, may not cover the sale.
- It does not cover the goods. A certificate states what the buyer resells. Goods outside that description, or goods the buyer uses rather than resells, such as fixtures and samples, are taxable.
Canada does not have one, and that catches US sellers
A US brand selling into Canada sometimes charges nothing, on the logic that the buyer is a reseller. Canada does not work that way. Business purchases pay GST or HST, and the buyer claims it back on its own return as an input tax credit. There is no certificate because there is nothing to exempt. A seller registered to collect who charged nothing is assessed for tax it never collected, from a buyer who would happily have paid it.
What a brand should do
Collect the certificate before the first exempt sale, not after. Check the state, the permit number and the expiry. Keep it where an auditor can find it years later, matched to the orders it covered. Ask for a fresh one when the old one lapses. Charge tax on any sale you cannot cover, and let the buyer recover it if they can.
On GRAJ a buyer uploads the certificate once to their profile, and it is on file for every brand they order from. A brand can see whether an order is covered before it ships, and the certificate stays attached to the record after. The work is done once, by the party that has the document, and the party that needs it at audit is the one holding it.