Launching a retail business in Colorado could set you on the path to financial prosperity if you know how to take advantage of the many opportunities offered by the Centennial State. Colorado has a wide-ranging local economy, which includes everything from tourism to agriculture, and can boast of the eighth-highest median household income in the U.S.
One of the routine procedures involved in maintaining a retail business is periodically replacing inventory when supplies get low. This generally involves contacting and purchasing from a wholesaler that handles the kinds of goods that the retailer sells. To conduct this type of transaction, it is usually required for the buyer to provide a document known as a resale certificate.
Resale certificates tend to confuse a lot of business owners in Colorado, as it’s common to get these documents mixed up with reseller permits, seller’s permits, and other licenses with similar names. But a resale certificate has a specific function that is not covered by any of these other kinds of permits. It’s definitely worth taking a few minutes to ensure you know what a resale certificate does and how you can use one in the course of your retail operations.
What Is a Resale Certificate?
In short, a resale certificate gives a retail business the right to purchase items on a tax-free basis. The only restriction is that these items must be resold later as part of the retailer’s normal business operations. Sales tax is charged only on this final resale transaction.
For example, if a retail business is running low on available computer monitors, it can purchase more from a wholesaler, without needing to pay sales tax, by giving the seller a valid resale certificate. The retailer is expected to collect the applicable sales tax when later selling these monitors to its customers.
In Colorado, the right to purchase goods tax-free in the manner described above is granted by Title 39, Article 26 of the Colorado Revised Statutes (C.R.S.).
Retail businesses that engage in these transactions should also have a standard seller’s permit—in Colorado, it’s called a sales tax license. However, it is important to understand that a sales tax license is not sufficient by itself for the purpose of legally conducting these kinds of tax-free transactions. You must also be able to provide a resale certificate. Failure to do so can expose you to penalties from the state.
Types of Resale Certificates in Colorado
The standard Colorado resale certificate form used to claim exemptions on sales tax is DR 0563. It is formally called “Sales Tax Exemption Certificate, Multi-Jurisdiction.” As its name suggests, it is also accepted in those states that have agreed to recognize this certificate.
In addition, the Colorado Department of Revenue issues general sales tax exemption certificates to non-profit, charitable, religious, and educational organizations operating in the state that qualify for income tax exempt status 501(c)(3) from the Internal Revenue Service (IRS). Organizations that meet these requirements can apply for a certificate by using DR 0715.
The state of Colorado also has resale certificates that apply to certain specific types of tangible property. These include DR 1191, for purchases of machine tools used in manufacturing; DR 1240, for purchases of pine or spruce beetle wood; and DR 1260, for purchases of gas and electricity for domestic use. In each case, the filer must ensure that they comply with all applicable requirements.
How It Works
A Colorado resale certificate is filled out by the purchaser in a tax-free transaction and given to the seller.
To begin, the purchaser can simply download a copy of DR 0563 from the Colorado Department of Revenue website. The purchaser should then carefully fill out the form and provide it to the seller at the time of the tax-free transaction, or as soon as possible afterward.
Be aware that the purchaser is expected to use the resale certificate for the purpose in which it was intended: obtaining goods, or the parts to assemble such goods, to be resold later. The certificate should not be used to buy items for the purchaser’s own use, such as employee office supplies.
If multiple purchases are made with the same supplier, only one certificate needs to be provided in a calendar year.
The seller has certain obligations as well. It is expected to perform due diligence to ensure that the goods being sold are of a type that the buyer customarily uses in the normal course of business. Furthermore, the seller should ensure that the buyer’s sales tax license and exemption certificate are both valid.
Failure to perform such due diligence could result in the seller being forced to pay the sales tax on the transaction. The seller is also expected to keep resale certificates in their records for at least three years.
Remember that you also will need a valid sales tax license if you expect to conduct these kinds of tax-free transactions in the state of Colorado. If you’re not certain how to start a small business in Colorado and acquire the necessary licenses, you can trust FastFilings for guidance. With our online ordering form, it takes just a few minutes to begin the process of obtaining your Colorado sales tax license.