Can an automotive-parts wholesaler accept a dealership's resale certificate—especially if it separately invoices the parts department—when some items will be consumed by the dealer and some resold?

Plain-English summary

A wholesale distributor of automotive repair parts and shop supplies sells to Colorado dealerships. It traditionally collected tax on these items because dealerships consume them in their service departments. But dealerships now say the items shouldn't be taxed at wholesale because some are resold to the public through the parts department (where the dealership collects sales tax). The distributor can't tell in advance which items (e.g., brake cleaner) will be consumed versus resold, so it asked: can it accept a dealership's resale certificate — particularly if it separately bills the parts department — and let the dealership handle the tax?

The Department's answer is yes, with due diligence:

• Colorado taxes retail sales but exempts wholesale sales (sales for resale): retail sales don't include wholesale sales (§§ 39-26-104(1)(a), 39-26-102(9)).
• A wholesaler can generally accept a retailer's Colorado sales tax license number as good and sufficient proof that a sale is for resale.
• The retailer must make a good-faith estimate of how much it will consume versus resell; a retailer that doesn't make reasonable assumptions can face substantial penalties.
• Separately billing the parts department is one method the Department accepts as a reasonable way to identify exempt resale purchases. Alternatively, the distributor can let the dealership self-assess the tax.
• But a distributor who knows or has reason to know that goods will be consumed (not resold) must require the dealer to make a reasonable resale estimate — a dealer can't simply claim all purchases are for resale when it knows some aren't.
• The Department presumes all sales are taxable and the distributor bears the burden of proving a wholesale sale, so keep records (consider getting the dealer's resale estimate in writing) and verify the license (online License Verification or the automated phone line).

What this means for you

Wholesalers and distributors

You can take a customer's Colorado retail license number at face value as proof of a resale sale — but only with genuine due diligence. If you know part of what you sell will be consumed by the buyer, you must make the buyer break out a reasonable resale estimate; you can't accept a blanket "it's all for resale." Because every sale is presumed taxable and the burden is on you, document your steps and verify the license is valid.

Retailers and dealerships buying at wholesale

If you buy at wholesale and consume some of it yourself, you must make a good-faith estimate of the consume-versus-resale split and account for tax on what you consume. Claiming everything is for resale when you know it isn't can expose you to penalties.

A practical mechanism

Separately invoicing the resale (parts department) purchases from the consumed (service department) purchases is a Department-accepted way to keep the two streams clean.

Common questions

Q: Can a wholesaler accept a resale certificate / license number? A: Yes. A wholesaler can generally treat a valid Colorado retail sales tax license number as sufficient proof of a wholesale sale — but must exercise due diligence and keep records.

Q: What if the buyer will consume some of the items?
A: If the distributor knows or has reason to know goods will be consumed rather than resold, it must require the buyer to make a reasonable estimate of the resale portion. A blanket "all for resale" claim isn't acceptable when it's known to be untrue.

Q: Is separately billing the parts department acceptable? A: Yes — the Department accepts it as one reasonable method to identify exempt resale purchases. The distributor can also let the dealership self-assess the tax.

Q: Who bears the risk if it's wrong?
A: All sales are presumed taxable and the distributor bears the burden of proving a sale was wholesale. When in doubt, collect the tax; the buyer can claim a refund (Form DR 0137).

Citations and references

Statutes and forms:

• § 39-26-104(1)(a), C.R.S. — sales/use tax on retail sales
• § 39-26-102(9), C.R.S. — retail sales do not include wholesale sales
• Claim for Refund Form DR 0137 — purchaser refund when tax is collected in case of doubt

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-08-003.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2008-3

XXXXXXXXXXX
Attn: XXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
February 14, 2008
Re: wholesale sales
Dear XXXXXXXX,
This letter is in response to your letter to the Colorado Department of Revenue, dated January 10, 2008, re: wholesale sales. Issue Can the company accept a retailer’s resale certificate if the company separately invoices the parts department for repair parts? Background You provide the following facts. The company is a wholesale distributor of automotive repair parts and shop supplies to dealerships located in Colorado. The company traditionally collects tax on repair and supply parts sold to dealerships because the parts and supplies are consumed in the service departments of the dealerships. Recently, however, dealerships have asserted that tax should not be collected on these items because the items are sometimes resold to the public by the dealership through its parts department. Dealerships assert that they collect sales tax from customers on such sales. The company, however, cannot determine whether a product it sells will be consumed by the dealership or resold to customers. As an example, you state that brake cleaner could be used by the service department or it could be resold to customers through the parts department. You ask whether you can accept a dealership’s resale certificate if you separately bill the dealership’s parts department. You also ask whether it is appropriate simply to accept the dealership’s resale certificate and let the dealership collect and report tax to the department when the dealership removes items from inventory to sell to the public. It may be that the dealer is charging for shop supplies on which it charges tax, accounting for their resale claim.

Discussion
Colorado imposes sales and use tax on the sale, use, storage, or consumption of tangible personal property. §39-26-104(1)(a), C.R.S. However, Colorado exempts from tax sales of tangible personal property that the purchaser intends to resell to another. See, §39-26-104(1)(a) (tax on retail sales) and 102(9) (retail sales do not include wholesale sales), C.R.S. A retailer who wishes to purchase goods at wholesale must provide the seller with its Colorado retail sales tax license number. A distributor who is asked to make an exempt sale must exercise due diligence in determining whether the sale is exempt. Where it is not clear whether a sale is exempt, the seller should collect tax and the purchaser may submit a claim for refund (Claim for Refund Form 0137). A wholesaler can generally accept a retailer’s Colorado retailer’s license number as good and sufficient demonstration that the sale is a wholesale sale. The retailer is obligated to make a good faith estimate of that portion of its purchases from a distributor it will consume and that portion it will resell to the public. A retailer which does not make reasonable assumptions may be assessed substantial penalties. The company’s suggestion that it separately bill the parts department is one method that the department will accept as a reasonable measure by the company to determine which sales are exempt from tax. Alternatively, the distributor can allow the dealership to self-assess the tax. However, a distributor who knows or has reason to know that property it sells to a dealership will be consumed and not resold, must require the dealership to make a reasonable estimate of the property it intends to resell. It is inappropriate for a dealership simply to claim that all its purchases are for resell when it knows or has reason to know that some portion of its purchases is not for resale. Unless the distributor knows or has reason to know that the dealership’s estimate is unreasonable, the distributor can accept the dealership’s estimate. As a wholesaler, you must maintain appropriate records to demonstrate that you have taken reasonable steps to determine whether a transaction is exempt. The department will presume that all sales are taxable retail sales and the distributor has the burden of establishing that the sale is a wholesale sale. For this reason, you may wish to ask the dealership provide you in writing its estimate of what purchases are likely to be for resale. As noted above, you must obtain the dealership’s Colorado retailer’s license number. The department has a number of automated resources that allow you to verify whether a license is valid. You can visit us at our web site at: www.revenue.state.co.us and go to Taxation (under “Main Categories”) > Sales Tax Information (under “On-line Services”) > Sales Tax License Verification. You can also call our automated telephone system at (303)238-FAST (3278) for license verification and other sales tax information. Finally, the Department makes a good faith effort to provide accurate and complete answers to questions posed to it by taxpayers. However, the information and answers provided here are not binding on the Colorado Department of Revenue, nor do they replace, alter, or supersede Colorado law and regulations. The Executive Director, who by statute is the only person having authority to bind the Department, has not formally reviewed and/or approved this response. Respectfully, Office of Tax Policy Colorado Department of Revenue