Tax Implications for Reselling

Reselling may be a viable option for those considering an additional side gig. However, before embarking on this venture, it is important to consider its potential impact on your tax situation. Reselling has advantages and disadvantages that must be weighed against one’s current circumstances.

Investigating some of the various side hustles available today may be an excellent opportunity to make extra money. For example, reselling is one popular way to make money on the side.

Retailers, such as department stores, grocery stores, automobile dealers, and catalog sellers, purchase goods for resale. Usually, the items that these resellers buy are only slightly altered before they are sold to the consumer. Typically, when retailers purchase those items, they do not have to pay a sales tax but must collect it when resold to the end user.

When running a reseller business, being aware of state sales tax laws is important. Unless an exemption applies, companies that maintain a physical presence within a state must collect taxes on items they sell there. This can surprise those who have yet to consider the possibility of operating in multiple states. Therefore, reviewing these taxes and regulations across state lines before engaging in commerce is essential.

One of the most common types of tax exemptions is a reseller exemption. This type of exemption, generally in the form of a resale certificate, allows merchants to purchase goods without having to pay taxes as long as they will be resold in the future. States typically provide their own format for such certificates or can accept an alternative one that meets local law’s required information criteria.

To ensure that your customers receive the appropriate resale exemption, obtaining a copy of their resale certificate is strongly recommended. This will help satisfy state auditors when they review the exemptions claimed. By having a valid and up-to-date certification on file, you can be sure you are compliant with all regulations.

Tax Filing Implications of Reselling

Before you decide to take up reselling, it is critical to understand the potential tax implications that come with it. Most notably, your net profit – gross profit less any costs incurred – will be considered taxable income according to federal, state, and local laws. Even though you may not receive a 1099 or other tax documents from your marketplace, such as Amazon, PayPal, eBay, etc., all of your earned income must still be stated, and the relevant taxes paid on parts are deemed taxable.

When making a purchase, some people may be exempt from paying sales tax, depending on their situation. Sales tax is usually applied to the customer by the merchant when purchasing an item for personal use. However, resellers who can prove that the item they’re buying will not be used for themselves may be able to make their purchase without having to pay any taxes. This generally requires registering with the relevant state government and the retailer in question.

Blanket Resale Certificates may help to maximize your tax.

Instead of selling to consumers, wholesalers typically distribute products to other businesses. As an expert wholesale reseller, you likely have numerous companies that regularly make exempt resale buys from you. To simplify such transactions for most customers, many states offer the option of using “blanket” resale certificates when ordering merchandise from vendors.

Having one blanket resale certificate can be incredibly convenient, allowing customers to make regular exempt purchases. However, the laws concerning collecting and maintaining valid certificates vary from state to state. It is recommended that you familiarize yourself with your home state’s regulations on this matter.

Gathering resale certificates from customers is an important task. You have to keep a log of all the valid and filled-out documents that were accepted in good faith. Once you are certain that you meet the criteria for accepting a certificate, you can give your customer’s order a resale exemption as well as the shipping costs.

When accepting trade-ins from customers to purchase new equipment, it is essential to be aware of each state’s regulations. Depending on where you are located, the value of a trade-in may or may not reduce the amount subject to sales tax. While there is no set definition of what qualifies as an acceptable trade-in, each state will have its own standards that must be followed.

Internal consumption may complicate your tax filing.

Using a resale certificate to buy inventory binds you to be accountable for any sales or use tax, which may apply once that property is resold. Consequently, should the inventory be used internally by yourself or your business, states view it as though it was sold and require you to pay applicable sales tax on its value.

An Example Case

After three months of attending sneaker events and showing off your 20 pairs of sneakers, you donate them to a local shop. To do this, you will need to pay use tax on each pair’s value when you initially purchased them.

In contrast, when you sell the demo sneaker at a demonstration, for tax purposes, the worth of the sneaker will be determined by deducting any discount given for its “used” status from the standard sales price.

Summary

For centuries, individuals have been reselling products as a side job. This practice has become even more popular recently. Fundamentally, it involves purchasing something affordable and then offering it to another customer for a higher cost.

When it comes to reselling products, you have a few options at your disposal. These include retail arbitrage, online arbitrage, or drop shipping. No matter which method you choose, it is vital to be aware of any associated tax implications and make sure that you report all net income or profit earned.

Never fear; you need not worry about all the intricacies of tax regulations. Your own PriorTax dedicated tax professional is here to provide free assistance and will take care of preparing, signing, and filing your taxes promptly and correctly. This way, you can have peace of mind that everything is done right.

This entry was posted on Thursday, October 12th, 2023 at 8:00 am and is filed under Tax and Life Changes, Tax Deductions and Credits, Tax for Business, Tax Tips and Tricks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.