Welcome to the world of sales tax exemption!
Updated: May 3, 2022
Not to be confused with income tax exemption which occurs in only rare circumstances such as charities.
I imagine many of you are wondering- what on earth is sales tax exemption and why is it important to me or my business?
Let’s break it down simply.
If you as a sole proprietor or your business is sales tax exempt and you have confirmed this with your supplier, this means you will not pay any sales tax when you purchase from them.
E.g Say you were working in retail arbitrage based in California, you sell a product to someone living in New York, you then buy the product from Walmart and send it straight to the customer without paying any sales tax. What would happen is either your marketplace facilitator (For example Amazon) would collect the sales tax owed from the customer automatically and pay it back to New York state or your customer would have to pay you the sales tax with the purchase and you would remit the tax back to New York yourself.
The biggest game changer about doing this is you save a huge percentage on your overall purchase cost, normally saving an average of 6% across all states. Some states charge as high as 9.5% sales tax.
So working on an average sales tax basis, if you bought $20,000 of products a month you would save $1200 every month and you have every right to as an online retail arbitrage reseller!
You have the choice to become sales tax exempt with all states or just selective states of your choosing. The more states you’re exempt with ultimately the more money you save, particularly with the big population states such as FL, CA, TX and NY. As a retail arbitrage business the sales tax owed all depends on the state you sell the product to. If you’re not exempt; sell a product to someone in Tennessee you’ll pay 9.53% Sales tax, sell a product to someone in Utah you’ll pay 6.1% sales tax.
So you now see the massive benefits of becoming sales tax exempt-
But how do you get exempt?
You would first need an EIN, CP575G letter (give from the IRS when getting your EIN), articles of incorporation/organisation if you have an LLC or corporation, a US bank account and ID.
You would first need to get sales tax exempt in your home state/the state your business address is based in. This would be done by applying for a sales tax ID with that particular state (often done through an online website application process). You would then be given a sales tax ID when approved, which you can put on a state specific resale certificate, sign and give to your supplier, along with a multijurisdictional form to cover all no nexus states (states you don’t need to get a sales tax ID to be exempt with). Once approved this would get you exempt with your home state plus all no nexus states which would total 34 plus your home state (if outside the already mentioned 34). You would also not pay sales tax in an extra 5 states that never charge sales tax AK, DE, MT, NH and OR. So you wouldn’t pay sales tax in 39 states.
So what about the other 11 states?
We are now left still paying sales tax in CA, CT, DC, FL, MD, MS, NY, TN, VA and HW. We will leave HW out as retail arbitrage businesses generally don’t sell to them because of their increased shipping costs and delivery times. Unfortunately the remaining 10 states still have some of the states with biggest populations- CA, FL and NY for example. All 10 in total house a population of over 109 million! This is actually exactly a third of the whole US population. In theory to miss these states out would be to miss out on 33.3% of all your sales tax savings
How do I get exempt in the final 10 states?
You would need to then rinse and repeat the same process explained above for your home state but with each of the 10 remaining states. Each state has a different application process and requires different forms to be filled out and then ultimately different resale certificates to be made and signed using your sales tax ID’s they will give you. Once completed you can upload all these documents to the suppliers of your choosing to confirm your exemption with these states.
I'm exempt- hooray!
Ok so you’re now fully sales tax exempt with Walmart and no longer pay any sales tax on your purchases. Just because you are sales tax exempt with one supplier doesn’t mean you’re automatically exempt with every other supplier. You need to confirm your exemption with each supplier you use through the handover of signed resale certificates and sales tax permits. Some suppliers aren’t even sales tax exemption compatible or make it very hard for you to be by charging you sales tax upfront and then expect you to prove your exemption and request a sales tax refund after all your purchases have gone through.
The good news is many big suppliers are very sales tax exemption friendly and once your exemption is confirmed, you don’t pay any sales tax on your purchases at all.
Examples of these big ‘exemption friendly’ suppliers are: Walmart, Home Depot, Sportsman’s Guide, Zoro and Amazon.
It is worth noting that for every state you have a sales tax ID in you must regularly file for.
I hope this has helped give an overview of the whole process.
If the concept of getting sales tax exempt has fried your brain or you simply just want to save yourself a lot of time and hassle, this is where RJM tax exemption services come in.
We offer a selection of totally hands-off services to complete some, or all of the explained processes above, depending on you and your business’s needs. So, you don’t have to lift a finger to get sales tax exempt.
We also offer a fully hands off sales tax calculation and filing service as well, to ensure all states you’ve opened a sales tax ID with are fully filled for and maintained professionally.
So what are you waiting for? Let's save you some money!