Updated: Feb 10, 2020
Question: What are the sales tax reporting requirements for sales to parties who wholesale the product into another state? Most of our drop ships to California are for customers that have resale certificates. Do we need to report that amount? Are wholesale distributors operating as a fulfillment center responsible for collecting sales and use tax?
Answer: The marketplace laws that dictate sale tax duties for wholesale distributors are layered on top of Wayfar, making the law a two-step process. Generally, you cannot collect a certificate of exemption without a license. We like to say, either “collect the tax or get the doc.”Every transaction between a buyer and a seller should be taxed or documented, which is a lot of work. Instead, many companies take the risk that they won’t get caught, while others assume they are exempt from sales tax collection because they are selling to a reseller or non-taxable entity instead of the end-user. How can companies ensure, without documentation, that they are dealing with a licensed reseller or tax-exempt entity? Without documented proof, the company should be taxing the transaction and collecting. Yet, few companies operate in this fashion if they perceive they are pure resellers, wholesalers or selling to exempt customers.
The precursor to getting the doc is a license. Wholesalers need to be a licensed and registered to collect the exemption certificate. Put another way, collecting a certificate is like collecting tax—you are a licensed vendor. Your duty as a wholesaler is to report 100% of the amount you sold, then back out non-taxable sales and other exemptions through relevant mechanisms, depending on the state. Read more: Sales Tax Exemption Certificates: Collect the Tax or Get the Doc