In California, the State Board of Equalization, known as the BOE or the SBE, imposes sales tax on the sale at retail of tangible personal property. By definition, if the sale is not "at retail" no sales tax is due on the transaction. For example, wholesale sales, i.e. a sale to someone who intends to again resell the property to a third party, is not a sale at retail. If your business undergoes a sales and tax audit, it is up to you to prove which of your sales was not at retail.
If you can't prove that your sales were not at retail during a sales and use tax audit, you have a sales tax problem which can potentially get very, very expensive and can lead to the untimely death of your business. Worse yet, if your business can't pay the sales tax, then you may get stuck with having to pay it out of your pocket. This is true even if your business is a corporation, LLC, or other entity which would normally insulate its owners from personal liability for the debts of the business.
The best method for a seller to prove that his purchaser intended to resell the property (and therefore that the seller was not required to charge sales tax), is to obtain a timely "resale" certificate from the purchaser. Obtaining a timely resale certificate creates a presumption that the property is purchased for resale. However, the presumption only applies if it is taken from a person who holds a California sellers permit. The resale certificate is timely only if it is obtained prior to the delivery of the product with the seller's normal billing cycle or before the purchaser is billed. Although the resale is required to be dated, if it is undated but it was obtained in a timely manner, it will not bet treated as invalid for lack of a date.
If you would like to see the form of the resale certificate prescribed by the BOE, here is a link. Feel free to reprint it and use it in your business. This form is one that was issued by the Multistate Tax Commission and adopted by the State of California along with many other states. It is intended to cover all of the requirements set forth in California Sales Tax Regulation 1668, Resale Certificates. tax. For example, it certifies that the purchaser has a California sales tax permit and that it intends to resell the property. There is no requirement to use the BOE form as long as the form used covers all the requirements of California Sales Tax Regulation 1668, but our tax attorneys recommend its usage because being able to present that during the course of a sales tax audit will speed up the process.
A resale certificate can be either a blanket resale certificate or a qualified resale certificate. California sales tax auditors are instructed that during a sales and use tax audit, they should determine if the resale certificate was prepared as a blanket certificate or a qualified resale certificate. If the certificate is a blanket one, then all the sales to that purchaser will be presumed to be non-taxable, i.e. not at retail.
A retail certificate is not retroactive and therefore, one that is received in an untimely manner does not relieve a business of the liability for sales tax. Nevertheless, the resale certificate is only one method of proving that a sale is not at retail. If a business does not obtain or maintain resale certificates, one of the ways our sales tax attorneys commonly demonstrate to the California State Board of Equalization that a sale was not at retail, is through using so-called "XYZ letters."
An XYZ letter is a letter sent to all, or usually just some, of the business' purchasers which seek to verify how the purchaser used or disposed of the property, i.e. to confirm whether or not the sale was at retail. The XYZ letter will typically include the following:
Sometimes a copy of the actual invoices is attached to the XYZ letter. The purchaser must check one of several boxes in the XYZ letter such as whether it was purchased for use or purchased for resale. After completion, the purchaser returns the letter either to the business or directly to the State Board of Equalization auditor. The auditor is not required to accept the XYZ letter and may follow-up with the purchaser, either orally or in writing, to make sure that it is accurate. A sample XYZ letter along with the instructions can be found here.
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