If you buy products at retail in order to resell them, you can often avoid paying sales tax when making the purchase.
In Colorado, this involves presenting a Colorado resale certificate to the merchant from whom you’re buying the products.
This quick guide will explain what you need to know about buying products in Colorado for resale, and about accepting a resale certificate from a customer.
If you Wish to Use a Colorado Resale Certificate
In Colorado, you can only use your resale certificate to either buy items for resale or component parts to make items you will later resale. You cannot use your resale certificate to buy items you’ll use in the normal course of business, such as office supplies.
Colorado merchants can accept a Colorado sales tax license (which is also a resale certificate). Colorado doesn’t issue a specific “resale certificate,” so you can just use your license number.
Unlike in some states, they can also accept out-of-state resale certificates. This means that you, the buyer who is buying products for resale, do not necessarily need to have a Colorado sales tax license in order to purchase items tax exempt from a Colorado seller. (Sellers show are registered in one of Colorado’s many home-rule cities should be able to use their sales tax license number as a resale certificate as well.)
If you do have a Colorado sales tax license, note that Colorado sales tax licenses (and thus, resale certificates) are renewed every two years. While the state will remind you to renew, it is your responsibility to renew your license. Also note that if you have a Colorado sales tax license you are required to collect sales tax from your Colorado buyers.
The state of Colorado requires retailers to keep records of purchases you made tax-free for resale for three years, and to make these records available if asked.
If, for some reason, the vendor will not accept your resale certificate and you decide to go ahead and buy goods for resale and pay the sales tax, you can always file a claim for a refund from the Colorado Department of Revenue by using the “Claim for Refund (DR 0137)” form. According to the Colorado DOR, “The statute of limitations for these refund applications is: three years after the twentieth day of the month following the date of purchase.”
If You are Presented with a Colorado Resale Certificate
It is ultimately the vendor’s responsibility to collect sales tax. So if you are presented with a Colorado resale certificate, you should very carefully evaluate it before accepting it.
Here are several ways to evaluate a Colorado resale certificate:
1.) Verify validity and expiration date – You can verify the validity and expiration date of Colorado resale certificates here. Here’s a link to verify the validity and expiration date of resale certificates in all states.
2.) Evaluate the purchase – Business buyers in Colorado are only allowed to buy either items they intend to resell or items they will use to manufacture other items to resale. Be cautious when accepting a resale certificate if the transaction seems suspicious. For example, if the buyer own a toy store but is attempting to buy office supplies for resale, they may not be using the resale certificate for a valid purpose. As the seller, it is your responsibility to collect sales tax in gray area situations. If you don’t, you may be on the hook to remit the sales tax you should have collected out of your own pocket!
3.) Keep it on file – Keep the buyer’s information on file in the event of an audit.
Sidenote: A few Colorado buyers may have a “Direct Pay Permit.” This permit allows buyers to pay sales tax directly to the state rather than paying at the point of sale. If you are presented with a Direct Pay Permit, be sure to keep a copy of it on file.
Colorado also recently issued a bulletin regarding accepting resale certificates. Check it out for more good information.
Do you have questions or comments about Colorado resale certificates? Start the conversation in our Sales Tax for eCommerce Sellers Facebook group!