Resellers can be individuals or businesses that purchase products from manufacturers or wholesalers to sell to consumers. They’re an important part of the supply chain because they ensure that more consumers receive a product.
Resellers profit by purchasing products in bulk at discounted prices lower than their resale value. They also have income tax obligations to meet, which involve reporting income, deducting expenses from income, and paying self-employment tax.
This guide will explore the tax obligations for resellers and the types of resellers among a few things.
Types of Resellers
Resellers can either sell products to consumers on e-commerce platforms or set a physical shot where consumers can walk in to buy their products.
Online Resellers
Online resellers do their business online. They sell products to consumers online on various platforms:
- E-commerce Websites: Resellers can create a seller’s account on various e-commerce platforms like Amazon, eBay, or Shopify. Consumers can create consumer accounts and buy products from resellers on the e-commerce platform.
- Social Media: Facebook has a Marketplace where resellers can provide products and services to consumers. Instagram also allows resellers to create an account and provides pictures of the merchandise they sell to consumers.
- Personal Websites: Some resellers build a personal website with a product catalogue. The website can be the reseller’s own e-commerce platform where consumers can order specific products.
Traditional Resellers
Traditional resellers set up a physical shop where consumers can walk in and pick a product before heading to the counter to pay. One of the physical shops they establish is the brick-and-mortar store. They can also have a market stall to sell the products.
Understanding Sales Tax
Resellers have to pay tax on the income they make through product resales. However, they have to collect sales tax from the consumers on the government’s behalf for remittance and pay income tax on the profit registered.
Resale Certificates
Resale certificates protect the resellers from paying sales tax when purchasing inventory from manufacturers or wholesalers to sell to consumers. The reseller will apply for a Certificate of Resale showing that indeed the reseller is buying goods for resale.
Sales Tax Collection
Consumers need to understand that sales tax is a small portion of the product price that goes to the government. Resellers price the products factoring in the sales tax. So, the resellers collect this tax and remit it to the government.
Income Tax Obligations
Resellers have to report income generated from the resale of products to the IRS. The reported incomes include sales that led to profits and losses. The reseller then deducts some expenses from the income reported:
- Cost of goods
- Total shipping costs
- Business expenses like advertising
What remains after the above deductions is a self-employment income. The reseller has to pay a percentage of this income to the IRS as an income tax obligation.
Common Deductions for Resellers
The Internal Revenue Service (IRS) allows the resellers to deduct a few expenses from the gross income to determine a taxable income.
Inventory Costs
The cost of inventory is the total amount of money the reseller has to pay for the acquisition and storage of the products that will be resold to consumers at a later stage. This cost also includes the cost of managing the inventory in a warehouse or storage.
The cost of inventory includes the actual cost of the products, rent for the warehouse, insurance, and ordering costs.
Operating Expenses
A business will also incur additional expenses that take money from the gross income, reducing the amount of taxable income. The reseller has to pay rent and utilities like water and electricity renting a physical shop.
The reseller will also pay salaries and wages because they have workers. Sometimes, resellers have to advertise and market the products, which is another operating expense. Goods in the inventory also need to be insured from accidental incidents.
Record-Keeping Requirements
Resellers have to keep a record of all sales for efficient income tax calculations. The sales record involves invoices and receipts recording sales registered both online and in the physical shop.
At the same time, the record should keep track of sales tax collected from the consumers.
Tax Planning Strategies
The federal government and the state both have laws and regulations resellers have to comply with. Understanding the tax laws helps the resellers know how much tax they owe to the IRS or any taxation body.
The reseller will then know the appropriate tax structure for their business. The reseller can either be in partnership or a sole proprietor. Each of these business structures has its taxation. Therefore, resellers need tax planning strategies for efficient tax remittance.
Conclusion
Resellers have an obligation to collect sales tax and remit it to the IRS. At the same time, they have to declare taxable income and pay a percentage of that income to the tax body.
Keeping a clean record of all sales and deducting the costs of operating the business helps the reseller pay what is rightfully owed to the IRS or the government.