As a tax attorney, I receive many questions about different tax issues and audits, especially when it comes to California taxes and the California Department of Tax and Fee Administration (CDTFA). Recently, I have been asked about the resale certificate and whether it allows business owners or sellers to not pay sales tax. Let’s look at what a resale certificate means for a buyer and seller and the mistakes that often come with the certificate and how they can trigger a CDTFA audit.
A resale certificate is a document that allows a business to purchase items tax-free from a supplier because those items will be resold to final consumers. The certificate is presented to the seller and tells them that the purchaser is buying property for resale rather than for its own use. When properly accepted, it generally allows the seller to make the sale without collecting sales tax. The buyer is then responsible for using the property consistently with the resale claim.
Here is a common scenario when it comes to resale certificates. A California seller makes a sale without collecting sales tax because the buyer provides a resale certificate. Meaning that the buyer is planning to take the purchased goods and resell them to collect sales tax. Oftentimes, the seller assumes the certificate shifts responsibility to the buyer. However, if the certificate is invalid, incomplete, improperly used, or the seller accepted it without reasonable care, the seller can become responsible for the tax.
It’s important to understand that having a seller’s permit and qualifying for a resale purchase are not necessarily the same thing. The seller should not simply accept a document at face value because it has the words “resale certificate” on it or if the buyer insists the purchase is for resale. If the buyer wants to avoid facing an CDTFA audit, they must take any and all necessary steps to assure the certificate is legitimate and minimize their own liability.
When reviewing a resale certificate, The CDTFA is going to look for a document that includes several things. Here are the most common resale certificate mistakes that are likely to cause an audit.
- Accepting a blank or incomplete certificate
- Accepting a certificate for property that obviously is not being resold
- Never reviewing certificates after receiving them
- Treating a customer’s seller’s permit as proof that every purchase is for resale
- Using one certificate indiscriminately for purchases that aren’t covered
- Failing to keep documentation
- Assuming the buyer (not the seller) bears all the risk
I urge California business owners who work with buyers and resale certificates to take several steps to protect themselves from mistakes, facing a CDTFA audit and owing sales tax. First, always consult with an experienced tax attorney who is familiar with resale certificates and CDTFA audits. Second, create a standardized certificate review process for your business and train sales and accounting staff if you rely on others in your sales processes. Third, maintain organized records and periodically review certificates for completeness and consistency. This ensures that you do not wait until a CDTFA audit to discover that documentation is missing.
A resale certificate can be an important tool for properly handling California sales tax. However, having that document does not outright protect the seller or business owner. And, as such, could trigger a CDTFA audit and the business owner paying taxes. Make sure you, as the business owner, understand whether the transaction actually supports a resale certificate. And always work with an experienced tax attorney who can help navigate this process and minimize your liability. Because even if it comes to the point where you do face an audit, the best defense is a consistent compliance process where you can show that you did everything possible in an honest and right way.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
