Over the past 20 years my position on the need for wholesalers to be registered has changed. My original position was based on the assumption (which I know is now false) that wholesalers have valid exemption certificates for all the sales they make. Over the past several years, I have been shocked by the failure of multistate wholesalers to have the exemption certificates they need to have. Over the years, this failure has cost these businesses a huge amount of sales tax, interest, and penalties that was paid on audit. As states continue to be short of revenue, they are looking for the easiest source of audit assessments. They have zeroed in on wholesalers who they know are missing exemption certificates for the sales they make. Why?
One of the pillars of the state sales tax system is the presumption that all sales of tangible personal property are taxable until the seller has documented proof that the sale is exempt. One of the largest exemptions is the “sale for resale” exemption. When wholesalers sell to retailers, the transaction is not taxable as long as the retailer provides the wholesaler the proper exemption certificate. How hard could this be? Apparently it is much harder than I had originally believed. Wholesalers, in their effort to make the sale, are quick let their customer promise to give them an exemption certificate after the fact. This often times never occurs which leaves the wholesaler fully exposed for any tax that was not charged. In the eyes of an auditor, it may make no difference that the retailer sold the merchandise and collected tax on the final retail sales. The point is, that the wholesale transaction was not properly documented which makes it a potentially taxable transaction.
So how does this align with the need to be registered. In short, “statute of limitations”. Many wholesalers have been operating for years in states without being registered for sales tax. No tax was ever due on their sales and they didn’t feel any obligation to register just so they could file “Zero Returns”. The states have wised up to this strategy and are now auditing these wholesalers. If nexus can be established, the states are going back 5 to 10 years and asking for exemption certificates for the untaxed sales. In many cases, the wholesalers cannot provide them and are assessed back tax, penalty, and interest.
I’m encouraging wholesalers to get registered and to file returns just so they can limit the audit look back to 3 or 4 years. This is also forcing them to collect and maintain exemption certificates. I’m also encouraging wholesalers to consider a voluntary disclosure even when no tax is due. A VDA could limit the look back for potential liability to just a few years. This could be a huge saving for the company.
If you are a multistate wholesaler and have nexus in several states, make sure you have all the resale exemption certificates you need to support your non-taxed sales. If you don’t and your customers are out of business, you may want to evaluate ways to come into compliance.
Wholesaler sales tax registration