Sales tax becomes confusing for online sellers because it can appear at two different points. A supplier may charge tax when inventory is purchased. The seller may also need to collect tax when the same products are sold to customers. Each transaction follows different rules.
For sellers who import, wholesale, or send products to a fulfillment partner, warehouse location can affect the tax charged on every inventory order.
A tax-free prep center in Delaware can be attractive because Delaware does not impose state or local sales tax. However, the location of the business entity, inventory, customer, and marketplace can each create separate tax obligations.
Choosing a state is therefore not only about company formation. The destination of inventory can affect the tax paid during purchasing. Storing products in a state can create a physical connection to that state. Customer locations can also determine where sales tax must be collected.
Sales tax on inventory purchases and customer sales are separate
The first transaction occurs when a business buys inventory from a manufacturer, wholesaler, distributor, retailer, or liquidation supplier. The second occurs when the business sells that inventory to the final customer.
Sales tax is generally intended to apply when taxable goods reach the final consumer. Inventory purchased only for resale can usually be acquired without paying sales tax if the purchaser provides valid resale documentation.
The reseller later collects sales tax from the customer when the sale is taxable and the seller has a collection obligation in the destination state. A marketplace may collect the tax instead when marketplace facilitator rules apply.
A resale exemption does not make the product permanently tax-free. It postpones the tax until the final retail transaction.
What is a resale certificate?
A resale certificate is a document given by the purchaser to the supplier. It states that the goods are being purchased for resale in the regular course of business.
The supplier keeps the certificate as support for not charging sales tax. The document is not normally sent to a state agency each time an order is placed.
- the legal name and address of the purchasing business
- the applicable sales tax permit or registration number
- a description of the products being purchased
- a description of the products normally sold by the business
- the name of the supplier
- the signature of an authorized person
- the date the certificate was issued
The Multistate Tax Commission resale certificate can be accepted in several states. Acceptance is subject to each state’s instructions and restrictions. A supplier may still require a state-specific form.
A sales tax permit and a resale certificate are not the same
A sales tax permit registers a business with a state so it can collect and remit sales tax. A resale certificate is the document used to support a tax-exempt inventory purchase.
In many states, the resale certificate uses the number from the sales tax permit. Some states accept an out-of-state registration number under limited conditions. Others require the purchaser to register locally before claiming the resale exemption.
The Streamlined Sales Tax exemption guidance makes clear that purchasers must confirm that they qualify for an exemption in the state where it is claimed. A single certificate should not be assumed to work everywhere.
Which state controls tax on the inventory purchase?
The shipment destination is often the most important location when a supplier decides if sales tax should be charged.
Suppose a seller operates an LLC registered in Florida but asks a supplier to deliver inventory to a warehouse in New Jersey. The supplier will usually look at the New Jersey delivery address and the resale documentation accepted for that transaction.
Inventory storage can create physical nexus
Nexus is the level of connection that allows a state to require a business to comply with its tax rules.
Inventory stored in a warehouse, fulfillment center, or third-party logistics facility can create physical nexus. The seller may not own the building or employ anyone in the state. Ownership of inventory located there may still be enough.
Pennsylvania, for example, states that online retailers with inventory stored at a Pennsylvania distribution or fulfillment center may have sales tax obligations. Its guidance for online retailers addresses registration and collection duties connected to inventory and direct sales.
- register for a sales tax permit
- collect tax on taxable direct sales to customers in that state
- file sales tax returns
- maintain exemption and transaction records
- review income, franchise, or other state tax obligations
Marketplace collection rules can reduce part of the sales tax workload. They do not always eliminate registration, filing, or other state tax duties created by physical inventory.
Economic nexus can apply without inventory or employees
A seller can also establish nexus through sales volume alone. The U.S. Supreme Court’s South Dakota v. Wayfair decision allowed states to require tax collection from remote sellers without a physical presence.
States now use economic nexus thresholds based on revenue, transaction counts, or both. Thresholds and calculation methods are not uniform.
- total sales into the state
- taxable sales only
- gross sales before returns
- direct website sales
- marketplace sales
- sales during the current or previous calendar year
A seller should not rely on one national threshold. Sales must be monitored state by state.
Marketplace facilitator laws change who collects the tax
Amazon, Walmart, eBay, Etsy, and other large marketplaces generally collect and remit sales tax on marketplace transactions where facilitator laws apply.
The seller usually does not separately collect sales tax from the customer on those orders. The marketplace calculates the tax and sends it to the state.
Marketplace collection does not mean the seller can ignore sales tax completely.
- sales made through its own website
- phone, wholesale, or invoice sales
- sales through a marketplace that does not collect in a specific jurisdiction
- inventory stored in other states
- state registration and filing requirements
- income, franchise, gross receipts, and business taxes
A business selling only through marketplaces may have a different filing position from a business that also accepts orders through Shopify, WooCommerce, social media, or direct invoices.
State formation does not control sales tax
Many online businesses form an LLC in Delaware, Wyoming, Florida, or another business-friendly state. The formation state does not determine every sales tax obligation.
| Location | Meaning |
|---|---|
| Formation state | The state where the LLC or corporation was created. |
| Operating state | The state where the owner, employees, office, or management activity is located. |
| Inventory state | The state where products are stored or processed. |
| Customer state | The destination where the final order is delivered. |
What happens when inventory moves between warehouses?
Inventory may begin at a prep center and later move to a marketplace fulfillment network. Amazon FBA and similar systems can distribute goods across multiple states.
The seller should identify where inventory is physically stored. Marketplace reports, fulfillment reports, and warehouse statements can help track these locations.
Moving inventory into another state may create physical nexus even before the seller crosses that state’s economic nexus threshold. The exact result depends on state law and the seller’s activities.
A prep center that keeps inventory in one known location can provide more control. A national fulfillment network may provide faster delivery but create a wider tax footprint.
Sales tax paid by mistake is not always easy to recover
A seller that fails to provide a resale certificate may be charged tax on inventory. Recovery usually starts with the supplier, not the state.
The supplier may allow the seller to submit a certificate and request a credit or refund. Time limits, invoice requirements, and internal procedures vary.
Paying sales tax on inventory and later collecting tax from the customer can create tax on both transactions. The first payment does not usually replace the seller’s obligation on the final retail sale.
Resale accounts should be approved before large orders are placed. Each invoice should be reviewed to confirm that the exemption was applied correctly.
Inventory withdrawn for business or personal use may become taxable
A resale exemption applies because the product is expected to be resold. Tax may become due when the business removes the item from inventory and uses it instead.
- keeping a product for personal use
- using inventory as office equipment
- giving products to employees
- providing free promotional items
- using products for demonstrations or testing
The business may owe use tax based on the purchase price or another amount determined under state law. The state of California explains that use tax can apply to property purchased for use or storage when sales tax was not collected.
Supplies and equipment are not inventory for resale
Boxes, tape, labels, shelving, printers, computers, tools, and office furniture are normally used by the business rather than resold to customers.
A resale certificate should not be used for these purchases unless the items are actually being resold as products. The business may owe sales or use tax on them.
Packaging can receive special treatment in some states when it becomes part of the product delivered to the customer. Rules differ for reusable containers, shipping materials, labels, and consumable supplies.
Drop-shipping creates another layer of state rules
| A drop-shipping transaction usually involves three parties |
|---|
| The customer places an order with the retailer |
| The retailer buys the product from a supplier |
| The supplier ships directly to the customer |
The supplier may request resale documentation that is valid in the customer’s destination state. A resale certificate from the retailer’s home state may not always be accepted.
New York, for example, provides specific drop-shipment sales tax guidance for primary sellers, suppliers, and qualified out-of-state purchasers.
Drop shippers should review certificate rules before advertising nationwide delivery. A supplier may charge sales tax when it cannot accept the retailer’s documentation.
Note: Drop-shipping was a financially accessible entry point into online business, but those seeking a service-based model may also consider freelancing from another country.
Final thoughts
Sales tax for resale inventory follows a clear basic principle. Products purchased for resale can often be bought without tax when valid documentation is provided. Tax is generally collected when the product is sold to the final customer.
The difficult part is determining which state’s rules apply at each stage. Inventory destination, warehouse location, customer address, marketplace activity, and sales volume can all affect the answer.
This article provides general information and is not legal, accounting, or tax advice. State rules change, and individual obligations depend on the seller’s complete business activity.
