If you would like to see the form of the resale certificate required by the BOE, you can find a link here. Feel free to reprint it and use it in your business. This form was issued by the Multistate Tax Commission and adopted by the State of California as well as many other states. It is intended to cover all requirements set forth in California Sales Tax Regulation 1668, Resale Certificates. Tax. For example, it certifies that the buyer has a California sales tax permit and intends to resell the property. It is not necessary to use the BOE form as long as the form used covers all the requirements of California Sales Tax Ordinance 1668, but our tax attorneys recommend using it because the ability to provide it during a sales tax check speeds up the process. Exceptions are legal exemptions that no longer require the retailer to charge VAT on a specific transaction or on all transactions with a customer. The most common exception is «sale for resale,» which allows businesses to purchase products tax-free in the hope that the business will subsequently sell the product and collect the VAT in effect at that time. Other exceptions may apply to transactions with special entities such as government organizations and not-for-profit organizations. A retail sales certificate is not retroactive and therefore does not exempt a business from VAT liability. However, the resale certificate is only a way to prove that a sale is not made at retail. If a business does not receive or retain resale certificates, one of the ways our sales tax attorneys typically prove to the California State Board of Equalization that a sale did not occur in retail is through the use of «letters XYZ.» Receiving these letters from suppliers can disrupt your day-to-day control operations.
Here`s what you need to know about these requests and how to respond. Following the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, the majority of states have passed economic connection laws requiring out-of-state sellers who exceed certain dollar and/or transaction thresholds to register and collect sales tax. A certificate of resale can be either a lump sum resale certificate or a qualified resale certificate. California sales tax assessors are responsible for determining, during a sales and use tax audit, whether the resale certificate was issued as a master certificate or as a qualified resale certificate. If it is a flat-rate certificate, it is assumed that all sales to that buyer are not taxable, i.e. they are not in the retail trade.
The letters XYZ are a great tool to minimize VAT risk. One downside is that if you`re selling to small businesses, small businesses are less likely to have accumulated and paid or verified a use tax. If your customers are larger, they are more likely to have already filled out VAT/use tax. You may be able to rank your customers in order of size and/or amount of VAT for your business and reach those customers first. Sometimes a copy of the actual invoices is attached to the letter XYZ. The buyer must check one of the following boxes in the letter XYZ, for example if it was purchased for use or resale. Once the transaction is complete, the buyer returns the letter either to the company or directly to the state compensation auditor. The examiner is not required to accept the letter XYZ and may communicate with the buyer verbally or in writing to ensure that it is accurate. A sample letter XYZ as well as instructions can be found here. Businesses are willing to pay their fair share of taxes unless they find that taxes have already been paid or that an exemption is possible.
Global Tax Management (GTM) can help you determine your tax liability when you receive an XYZ letter and help you overcome other tax challenges in the complex and ever-changing landscape we live in today. For more information, please contact me at jcunningham@gtmtax.com. An XYZ letter is a letter sent to all buyers of the business or generally to some of them to verify how the buyer used or sold the property, i.e. to confirm whether or not the sale was made in retail stores. The letter XYZ generally contains the following: However, what options does a seller have if there is no applicable exemption and has not collected sales tax? That`s where the letter XYZ comes in. XYZ letters are often used when sales tax was due and the seller did not collect sales tax and there is no applicable exemption. An XYZ letter is a form letter sent by a vendor to a customer to process sales tax on previous transactions. The general format was developed by California auditors a few years ago, but has since become the standard format for letters from suppliers to customers. You are likely receiving these letters for one of the following reasons: If you can`t prove in a sales and use tax audit that your sales weren`t made in retail, you have a sales tax problem that can potentially become very, very expensive and lead to the premature death of your business.
Even worse, if your business can`t pay sales tax, you may have to pay it out of pocket. This is true even if your business is a corporation, LLC, or other entity that would normally isolate its owners from personal liability for the company`s debts. As a seller, you are responsible for collecting and reporting applicable VAT (assuming you have a VAT link in the applicable jurisdiction). As mentioned above, exceptions include if your customer made the purchase for resale, if your customer paid the tax directly to the state, or if your customer is exempt from sales tax. Sellers create VAT risks if they do not charge sales tax and do not request and verify an applicable exemption certificate. In the event that an exemption applies (e.g. a resale transaction), the seller has the option of requesting from his customer an exemption certificate for resale, even after the transaction has taken place. If you need help understanding your VAT obligations and need to collect VAT, please contact us. TaxConnex has experts to help you answer these questions and help you set up an ongoing process to ensure you stay compliant, even with frequently changing sales tax and use tax rules. The best way for a seller to prove that their buyer intended to resell the property (and therefore the seller did not have to charge sales tax) is to obtain a timely «certificate of resale» from the buyer.