When a business purchases inventory to resell, they can do so without paying sales tax. In order to do so, the retailer will need to provide a Colorado Sales Tax Exemption Certificate to their vendor.
Learn more about what the exemption certificate is, how to get one, and more.
What is a Sales Tax Exemption Certificate?
When retailers purchase products to resell, they often don’t pay sales tax to the supplier on the purchase. The sales tax will still be paid, but instead of the retailer paying sales tax, the retailer charges sales tax to their customer on the final value of the merchandise. The collected sales tax is then sent by the retailer to the Colorado Department of Revenue.
For example, when a pet store purchases dog toys from their supplier to sell in the store, the pet store owner won’t typically have to pay sales tax to their supplier. When a customer (or end-user) purchases the dog toy, the retailer will charge sales tax to the customer based on the full price of the toy. The retailer will collect the sales tax from all their transactions and periodically (typically at the end of the month) send the sales tax to the state.
The purpose of the certificate is to provide evidence of why sales tax was not collected on a transaction. Similar names for a resale certificate include reseller number, seller’s permit, exemption certificate, wholesale license, or reseller’s license. In order for the supplier to allow the tax-exempt purchase, the seller needs proof the buyer intends to resell the product by providing a valid resale certificate.
The sales tax exemption is only intended to be used for inventory that will be resold and not intended for the tax-free purchase of items used in normal business operations such as paper, pens, etc.
Before a business starts selling products or providing taxable services, they must first get a Colorado Sales Tax License from the Colorado Department of Revenue. The Sales tax license is sometimes referred to as a seller’s permit, sales tax number, or sales tax permit.
The sales tax license and exemption certificate are commonly thought of as the same thing but they are actually two separate documents. The sales tax license allows a business to sell and collect sales tax from taxable products and services in the state, while the exemption certificate allows the retailer to make tax-exempt purchases for products they intend to resell.
After registering, a sales tax number will be provided by the Department of Revenue. This number will be listed on the Sales Tax Exemption Certificate.
A Sales Tax Exemption Certificate (Form DR 0563) is provided by the Department of Revenue to document tax-free transactions.
DR 0563 Sales Tax Exemption Certificate Fillable Form
How to fill out the Colorado Sales Tax Exemption Certificate – Form DR 0563
Filling out the DR 0563 form is pretty straightforward, but is critical for the seller to gather all the information.
If audited, the Colorado Department of Revenue requires the seller to have a correctly filled out DR 0563 Sales Tax Exemption Certificate. Without it correctly filled out, the seller could end up owing sales taxes that should have been collected from the buyer in addition to penalties and interest.
Steps for filling out the DR 0563 Colorado Sales Tax Exemption Certificate
Step 1 – Begin by downloading the Colorado Sales Tax Exemption Certificate Form DR 0563
Step 2 – Identify the business name and business address of the seller
Step 3 – Identify the name and business address of the buyer
Step 4 – Check the reasons why the buyer qualifies to not pay sales tax. Options include:
- Charitable or religious
- Political subdivision or governmental agency
- Other (must specify)
Step 5 – Describe the products to be purchased from the seller
Step 6 – The purchaser will certify the property being purchased is for resale and sign and date the certificate.
The resale certificate is kept on file by the seller and is not filed with the state.
Does a Colorado Sales Tax Exemption Certificate Expire?
A seller must re-verify the purchaser’s resale license or tax exemption certificate each calendar year.
Are sellers required to accept exemption or resale certificates?
Sellers are not required to accept exemption or resale certificates from other states. If the vendor doesn’t accept the certificate, the buyer will have to pay sales tax on the merchandise being purchased. In most cases, they will be able to get a credit for the sales taxes paid later on their sales tax filing.
What steps should a business take to accept an exemption certificate?
When a business is presented with a resale certificate, the burden of proof is on the seller to verify that the buyer’s information is correct and to keep these records. Failing to verify this information may put the liability of paying Colorado sales taxes on the seller.
To verify whether a Colorado exemption certificate is valid
- Review the certificate to make sure it is completely filled out.
- Verify the purchaser’s Colorado Sales Tax License by visiting the Colorado Department of Revenue’s website and click on the “Verify a License or Certificate” link.
- Sellers are also responsible for considering whether the goods and services sold are consistent with the purchaser’s claim that the sale is exempt from sales taxes if the purchases are over $250. For example, if the buyer’s business is a car dealership but they are wanting to purchase office supplies tax-free, the seller should investigate further.
- Keep a file of exemption certificates.
More information regarding the documentation of exempt sales can be found from the Colorado Department of Revenue – 1 CCR 201-4.