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 an Iowa Sales Tax Exemption Certificate to their vendor.
Learn more about what a Sales Tax 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 Iowa 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 an Iowa Sales Tax Permit from the Iowa Department of Revenue. The Sales Tax Permit is sometimes referred to as a seller’s permit, sales tax number, or sales tax license.
The sales tax permit and Sales Tax Exemption Certificate are commonly thought of as the same thing but they are actually two separate documents. The Sales Tax Permit allows a business to sell and collect sales tax from taxable products and services in the state, while the Sales Tax 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 31-014a) has been created by the Department of Revenue to document tax-free transactions.
Form 31-014a Sales Tax Exemption Fillable Certificate
How to fill out the Iowa Sales Tax Exemption Certificate – Form 31-014a
Filling out the 31-014a form is pretty straightforward, but is critical for the seller to gather all the information.
If audited, the Iowa Department of Revenue requires the seller to have a correctly filled out 31-014 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 31-014 Iowa Sales Tax Exemption Certificate
Step 1 – Begin by downloading the Iowa Sales Tax Exemption Certificate Form 31-014a
Step 2 – Identify the name, business address, general nature of the business and telephone number of the purchaser
Step 3 – Identify the name and business address of the seller
Step 4 – Indicate whether the purchaser is doing business as a:
- Retailer (If so, include the sales, use of excise tax permit number)
- Retailer car dealer (If so, enter the DOT number)
- Governmental agency
- Nonprofit hospital
- Private nonprofit educational institution
- Qualifying residential care facility
- Nonprofit museum
- Commercial enterprise
Step 5 – Indicate the reason the purchaser is claiming the sales tax exemption
- Qualifying Farm Machinery/Equipment
- Qualifying Farm Replacement Parts
- Qualifying Manufacturing Machinery/Equipment
- Research and Development Equipment
- Pollution Control Equipment
- Recycling Equipment
- Qualifying Computer
- Qualifying Replacement Parts/Supplies (Manufacturing, R&D, Pollution Control, Recycling, Computer)
- Qualifying Computer Software, Specified Digital Products and Digital Services
Step 6 – Describe the description of what the buyer will be purchasing
Step 7 – The purchaser will affirm the information on the form is correct, then sign, include their title and date
The Sales Tax Exemption Certificate is kept on file by both the buyer and seller and is not filed with the state.
Does an Iowa Sales Tax Exemption Certificate Expire?
Iowa Sales Tax Exemption Certificates are good for up to three years.
Are sellers required to accept Sales Tax Exemption Certificates?
Sellers are not required to accept Sales Tax Exemption Certificates, however most do. 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 a Sales Tax 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 Iowa sales taxes on the seller.
To verify whether the Sales Tax Exemption Certificate is valid
- Review the Sales Tax Exemption Certificate to make sure it is completely filled out.
- Sellers are also responsible for examining the certificate and evaluating whether the goods sold are reasonably consistent with the purchaser’s line of business. 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 Sales Tax Exemption Certificates.