Selling to Resellers vs. Consumers - Two Tax Scenarios for Manufacturers and Distributors
- Sales and Use Tax
- January 30, 2015 | Avalara
For manufacturers and distributors, sales and use tax compliance isn’t always top of mind; yet getting it wrong can result in costly audits, fines, and penalties. Sales tax compliance poses specific challenges for most transaction types, including resale exemptions and direct sales to consumers.
Both manufacturers and distributors make direct sales to retailers or other distributors. Sales of products intended to be resold to consumers can be exempt from sales tax collection under a resale exemption. Since sales taxes are required to be paid only once, the theory behind a resale exemption is simple: the customer (consumer or end user) will pay sales tax on the full retail price so when the reseller purchases from the manufacturer or distributor, they can be exempt from paying sales tax on that transaction.
Resellers who want the benefit of the exemption must present manufacturers and distributors with current and effective proof of their resale intentions. The most common form of this proof is the Exemption Certificate. In order for exempt purchases to be documented properly, a manufacturer or distributor must maintain exemption certificate information for each state or locality where the reseller receives product. The same rules apply for sales made by a manufacturer to a distributor or forwarder who intends to either collect tax on their own direct sales, or who intends to sell the products to another reseller.
Distributors must also ensure their own tax-exempt status is maintained and exemption certificate information is provided to each manufacturer or supplier they work with. After all, they are considered a reseller in a manufacturer or supplier’s eyes.
Sales to Consumers.
Direct sales to consumers include sales of spare parts, updates, or replacement wear items. It is the manufacturer or distributor’s obligation to ensure that accurate and current sales tax rates, taxability rules and boundaries are applied for each taxable sale. Selecting an automated solution that integrates with your online shopping cart to deliver instantaneous and accurate sales tax calculations is critical to customer satisfaction.
Adjusting the sales tax after the shopping cart experience delivers a final cost can cause heartburn with your customers when they see that the online statement does not match their credit card amount.
An automated sales tax solution helps manufacturers and distributors negotiate complex sales tax rules around reselling and direct sales to consumers.
Learn more about tax compliance for manufacturers and distributors by reading the free white paper “Automating Exemption Certificate Management.”