Several States Address Rules on the Proper Use of Resale Certificates

The rules regarding when it is appropriate to provide a resale certificate are not always clear, and businesses that issue resale certificates incorrectly can be subject to sales tax liabilities.

By Tina M. Chunn, SALT Senior Manager

Resale certificates are used by retailers to purchase goods for resale in its present form or as a component of other property.  However, the issue of when an item purchased is actually “resold” can be confusing and may lead to a taxpayer providing a resale certificate where it is not warranted.  When that happens, the seller is often relieved of any liability, and it is the party that provided the resale certificate that is stuck with the liability.

Three common areas of confusion are: 1) property purchased to be used in providing a service; 2) property provided as a promotional item (perhaps to sell a service); and 3) property provided to customers that is not clearly identified as a sale (consumables).

The first area of confusion occurs when a retailer (or service provider) purchases property that is used to provide a service.  Recently, Georgia addressed this subject in a letter ruling[1]pertaining to the purchase or lease of copy equipment used in copy shops to provide self-service copying and printing.  In Georgia, a lease is also considered a type of sale and thus, may be considered a purchase for resale if the property is re-leased to others.[2]  In this case, the copy shop’s customers are charged only for the copies produced.  The state explained that the copy shop does not lease the copiers to their customer since they do not enter into lease agreements or otherwise transfer the possession or control of the equipment.  Further, since the customer does not receive full possession or control for a set time, this use would not be considered a lease of the copiers.  Therefore, the purchase of the copiers does not qualify as a purchase for resale, and tax should be paid by the copy shop on the purchase or lease of these machines.

Another area of confusion surrounds the purchase of goods with a resale certificate when those goods are given away as promotional items.  State rules generally require consideration for an item in order for such item to be “sold.”  Therefore, the purchase of goods to give them away generally does not qualify as a resale.  What is tricky in these cases is when the item given away is provided along with something else that is sold.  The Michigan Court of Appeals addressed this issue in a recent ruling.[3]  The company sold service contracts for a single mobile phone service provider as well as cell phones and related equipment. The company provided a resale certificate for the phones that it purchased.  On audit, the company assessed use tax on phones that were given away at no charge to customer that purchased a mobile phone service contract.   The Court concluded that the company owed use tax on the use of the phones as a use for promotional purposes.

The final point of confusion concerns the purchase of items that are provided to customers as part of the sale of something else but are not specifically itemized.  This is perhaps similar to promotional items, but the seller views the price of the good or service sold as including these other items.  Typically, the failure to specifically show the items as being sold will make them ineligible to be purchased for resale. Texas addressed this issue in a recent Court of Appeals decision.[4]  In that case, the company owned a hotel in Texas and charged its customers for the right to occupy its hotel rooms.  The company purchased consumables such as facial tissues, coffee, toilet paper, soap, shampoo, lotion, bath soap, and cups to be placed in the rooms for use by their guests.  The company did not pay sales or use tax on the purchase of these items since they considered these items to be part of a sale for resale.

The hotel claimed the room rate charged to its customers included a charge of $1.57 for all the consumables available to the customer.  However, this charge was not itemized on the bill nor were the customers informed that they were paying for the consumables.  In fact, the hotel’s website advertised that the “extras aren’t extra” and that the “extras” were “free”.  Additionally, customers could request unlimited amounts of consumables without extra charges.  Therefore, as a result of this evidence, the court ruled that the hotel operator is not entitled to the resale exemption on the purchase of these items since they are not sold to the hotel’s customers.

As evidenced by the cases above, the sale for resale exclusion continues to be a complex issue.  For example, advertising a promotion as “buy one get one free” versus “buy two get 50% off each,” while economically similar, often results in different sales/use tax consequences.   Aprio’s SALT team is experienced with these types of transactions and can assist your business with the sales tax treatment of your transactions so that you remain in compliance with your multi-state sales tax obligations.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the March 2019 SALT Newsletter.

[1]Georgia Letter Ruling Number LR SUT-20018-05, June 13, 2018.

[2]O.C.G.A. §48-8-2(33)(A).

[3] Emery Electronics, Inc. v. Dept. of Treasury, Dkt. No. 342250 (Mich. Ct. App. Feb. 12, 2019).

[4]Alamo National Building Management, LP v. Glenn Hegar, Comptroller of Public Accounts of Texas.  Court of Appeals of Texas, Thirteenth District, Corpus Christi, Edinburg, No. 13-17-00040-CV, 2019 Tex. App. LEXIS 4061, January 24, 2019.  On March 7, 2019, the taxpayer petitioned the Texas Supreme Court to review this case.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.