California Resale Certificates: How to Save Money When Purchasing From a Supplier

2021-03-22

In this guide, we will focus on resale businesses in the state of California and their options when it comes to saving money when buying merchandise from a supplier to resell. We will discuss the legal steps required to create a resale business in California, as well as the ways you can save cash when purchasing stock by using a California Resale Certificate.

How to Register a New Business in California

One of the first decisions you need to take is to choose a location for your business. You have the option of using a spare bedroom or garage as your office/storage space, or you may rent a warehouse or a storefront, depending on your ambition.

In any case, for any questions regarding the location, or the set-up process for your business, the California Secretary of State suggests you contact the California Business Investment Services unit of the Governor’s Office of Economic Development (GO-Biz).

GO-Biz provides you with the tools and services as well as a step-by-step guide on how to set up your business. According to the regulatory framework, anyone planning to conduct business in California must register and form a legal entity with the Secretary of State’s Office.

You will need to file for the appropriate taxes, obtain business licenses and other permits, and register as an employer if you plan on having employees. You will also have to find out whether your business needs any specific permits or licenses. For example, since we are talking about a resale business, are you eligible for a California Resale Certificate?

Depending on your business’s size, you have several options for registering business or entity type. A sole proprietor is not required to register with the Secretary of State’s Office. Although, as a sole proprietor, you have total control over the business and its profits, you are also entirely and personally responsible for all taxes and business liabilities. It has to be noted that, while you may not need to file formation documents with the Secretary of State, other filings may be required, depending on the type of business.

Another option is to register as a Corporation, an entity that exists separate from its owners. This means that you are personally shielded from business liabilities. To form a Corporation, you have to file Articles of Incorporation with the Secretary of State. Beware – this type of business is better suited for larger companies rather than for a small resale business you can run from home.

Other options include Limited Liability Company (LLC) which offers liability protection to its owners, similar to a Corporation, but is taxed differently. Furthermore, it can have a number of managers, but an operating agreement is required among the members. In order to set up an LLC, you are required to file Articles of Organization (Form LLC-1) with the Secretary of State’s office. The operating agreement does not have to be filed with the California Secretary of State but has to be kept with other records of the LLC.

You may also choose entity types such as Limited Partnership (LP), General Partnership (GP), and a Limited Liability Partnership (LLP).

An LP provides some liability protection for some partners. The entity requires a general partner acting as a controlling partner as well as a limited partner. This limits the liability of most partners to the amount of control or participation. General partners have unlimited personal liability. A Certificate of Limited Partnership (Form LP-1) has to be filed with the Secretary of State’s office.

A GP needs two or more people engaging in a business for profit. Partners are jointly liable for all the partnership’s obligations, but the profits are taxed as the partners’ personal income. A Statement of Partnership Authority (Form GP-1) has to be filed with the Secretary of State’s office when creating a General Partnership.

According to the California Secretary of State’s Office, an LLP is a partnership that engages in the practice of public accountancy, the practice of law, the practice of architecture, the practice of engineering or the practice of land surveying, or provides services or facilities to a California registered LLP that practices public accountancy or law, or to a foreign LLP. This means this business type is not suitable for a resale business.

To register an LLP in California, partners have to file an Application to Register a Limited Liability Partnership (Form LLP-1).

Regarding California state tax requirements, all businesses are required to file a state income tax with the Franchise Tax Board (FTB). Businesses with employees, partnerships, and corporations have to obtain a Federal Employer Identification Number (EIN) from the IRS. A sole proprietorship does not have to apply for an EIN as you may use your SSN when registering a business; however, it is advisable to apply for an EIN.

If you are not sure about the tax requirements your business may have, consult an attorney or turn to a business advisor to explain everything to you in detail. Tax is an aspect of your business where mistakes can be very costly.

With the business also revolving around buying and selling merchandise, which can be conducted online and internationally (should you decide to do so), you may need to seek further information about importing and exporting goods.

According to the California Business Portal, the departments you may have to visit on the state level include:

Department of Tax and Fee Administration: Sales and Use Tax – Interstate and Foreign Commerce
Department of Public Health: Food and Drug Branch Export Document Program
Department of Food and Agriculture: California State Trade Export Program (STEP)

On the Federal level, you may have to deal with the U.S. Department of Commerce when it comes to securing an export license. Additionally, California’s Business Portal, a partnership between GO-Biz and the State’s Information Technology Leadership Academy 22, notes that the use of CalGOLD, an online permit assistance tool, can help you identify your local, state, and federal permit information.

One of the permits you are certainly required to have is a Seller’s Permit. This will allow your business to collect tax from customers and later report it to the state.

California Seller’s Permit

In California, retail sales of tangible items are subject to sales tax. This may include furniture, toys, apparel, and electronics. Some items are exempt; for example, certain food products for human consumption or items paid for with food stamps. In any case, if you plan on doing resale, you are required to file for a California Seller’s Permit.

To obtain a California Seller’s Permit, you may be required to make a security deposit. Still, the process can be completed online or through the California Department of Tax and Fee Administration.

You are required to provide the following:

Your social security number (corporate officers excluded)
Your date of birth
Your driver license number, state ID number, or other ID (e.g., passport, military ID)
Names and location of banks where you have an account
Names and addresses of suppliers
Name and address of bookkeeper or accountant
Name and address of personal references
Expected average monthly sales and the amount of those sales which are taxable
Your email address
If you have purchased an existing business, you must also provide the previous permit information.

Also, partners, corporate officers, and limited liability company managers are also required to provide the above information.

We have said that businesses making retail sales of tangible items are subject to tax, meaning you have to collect tax and report it to the state. However, when you are buying merchandise strictly for resale, as a registered seller, you can avoid paying sales tax by providing your supplier with a California Resale Certificate.

How To Obtain and Use A California Resale Certificate

When sourcing goods for your business, keeping the purchase costs low is of the utmost importance. There is a statewide tax of 7.25 percent in California, which can be increased by up to an additional 1 percent, depending on district taxes. As it will exempt you from paying resale tax, the California Resale Certificate will help you save on your purchasing costs and boost your profit margins. A California Resale Certificate is required when you source your merchandise from sites like DirectLiquidation.com.

You do not need to file for a California Resale Certificate. You can obtain it by simply downloading the General Resale Certificate from the CDTFA and issue it when purchasing goods for resale in the regular course of your business, with all the required information filled in.

Additionally, you may use your California Resale Certificate when buying materials that will become a physical part of an item held for resale, or when purchasing items solely for demonstration or display while holding them for sale in the regular course of business operations.

While you may use the California Resale Certificate, you may also receive one during the course of your regular business. However, you should check whether the certificate you receive is valid or not. You should only accept a Resale Certificate from a business you know resells the products you are supplying them with. In general, a Seller’s Permit is needed to use a Resale Certificate. You may check the validity of a Seller’s Permit online through the CDTFA or by calling an automated toll-free number at 1-888-225-5263.

Once you accept a Resale Certificate, you are required to keep it in your records for at least four years. Resale Certificates are valid until they are revoked in writing.

The details that need to be included in the California Resale Certificate are:

The name and address of the purchaser’s business.
The purchaser’s seller’s permit number or an explanation stating why the purchaser is not required to hold a seller’s permit.
A description of the property to be purchased.
A statement that the described item is being purchased for resale. The document must contain the phrase “for resale.” Phrases such as “nontaxable” or “exempt” are not acceptable.
The date of the document (an otherwise valid Resale Certificate will not be considered invalid solely because it is undated).
The signature of the purchaser, purchaser’s employee, or authorized representative.

NOTE: Repeat customers and customers who use purchase orders are not required to provide you with a California Resale Certificate for each purchase. Rather, they can provide one blanket resale certificate with a general description of the products they intend to buy.

Notice that the Resale Certificate will only exempt you from paying sales tax if used for the purposes of reselling the merchandise. You can’t use a Resale Certificate to purchase items for personal use or that you do not intend to resell.

The misuse of a Resale Certificate is a misdemeanor. This means you can be penalized for the Improper use of the California Resale Certificate: you will still owe the amount of tax that would be due had the certificate not been used, as well as interest tax on the tax due.

Furthermore, you may lose your seller’s permit and have to pay a 10% penalty of the tax or $500, whichever is highest, as well as a 25% penalty for fraud or intent to avoid tax.

This is why you have to make sure you know all the tax requirements and the legal framework within which your business operates. Savings can be made if you use the California Resale Certificate appropriately; mistakes will cost you a lot more.

Information deemed correct as of February 2021. For up-to-date information, please check the California Secretary of State’s Office.