What Do Wholesale Distributors Do With Your Tax ID?
As a business owner, you've probably been asked to provide a tax ID number when you buy from a wholesale distributor. State revenue departments assign these numbers to businesses that qualify for sales tax exemptions, and wholesale businesses must keep these certificates on file to show that they haven't been exempting customers without proper authentication. Some wholesale businesses provide cards or key chain tags with bar codes so that customers who have tax identification numbers on file can quickly and easily verify their company information.
According to sales tax laws and conventions, a product should be taxed only once, when it is sold to the end user at the retail level. A product may be sold through multiple distributors and finally from a distributor to a retail merchant, but the only vendor who should collect sales tax is the retailer who sells it to the end user, or retail customer, who will take it home and use it rather than selling it to someone else.
Although wholesale distributors primarily sell products that other wholesalers will turn around and sell to their own customers, they also sometimes provide products that their customers will find useful but will not resell. For example, a distributor who sells sunglasses may also offer a rack that his customers can purchase to display them. A retail customer who purchases such a display rack is required to pay sales tax on it because he becomes the end user by using it in his store rather than reselling it.
In most states, including Arizona, grocery food for home consumption is not subject to sales tax even when it is sold at a retail level. Distributors who sell food products are allowed to sell these items even to the general public without collecting sales tax, and these exemptions do not hinge on whether or not a customer provides a resale certificate.
Wholesalers file the same city and state revenue tax forms as retailers. These forms have fields for businesses to provide information about sales volume as well as types of transactions, such as wholesale and retail. A business that transacts retail sales subject to sales tax enters this information in a field corresponding to the applicable sales tax rate. A business that makes wholesale sales not subject to sales tax records this information in a field that corresponds to a much lower wholesale gross revenue tax rate.