by TaxJar January 19, 2023
When selling products wholesale, you generally do not have to worry about charging sales tax. (Therefore, when buying items at wholesale, you generally do not need to worry about paying sales tax.
However, before you tear up your sales tax permit, let’s dig into what’s going on with wholesale sales tax.
What does “wholesale” mean?
Selling wholesale is when a business sells goods to retailers in order for the retailer to sell the goods to end users at retail.
Wholesalers can be manufacturers, who make the goods on site and then sell them directly to retailers. Or, wholesalers can be “middle man” companies who buy directly from factories, distributors, or other sources and then resell them to retailers.
Wholesalers generally do not sell to the general public, though that isn’t always the case.
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Sign upWhy is there no sales tax on wholesale sales?
In the United States, sales tax is charged at the point of sale to the end user. (This is part of why sales tax is sometimes referred to as “sales and use tax.” See the difference between sales and use tax here.)
Wholesalers are not required to charge sales tax to retailers because when a wholesaler sells to a retailer, that retailer is not the product’s end user. Therefore, the wholesaler does not have to collect sales tax on the transaction when selling to a retailer.
Fun fact: The US sales tax system is different from the value added tax (VAT) used by many other countries around the world. Unlike sales tax, VAT is generally charged every step of the way, from when the manufacturer sells to the distributor, when the distributor sells to the wholesaler, when the wholesaler sells to the retailer, and when the retailer sells to the end user.
You can think of sales tax in the US as being a tax on a retail sale. While VAT is a tax on an item or transaction, following that item along its journey from manufacturer to distributor to retailer — to landing in the hands of the end user.
Sales Tax When Buying and Selling Wholesale
Wait, but we just said there are no sales taxes on wholesale sales!
While this is true, sales tax still needs to be addressed when purchasing or selling items at wholesale. Retailers who purchase products for resale without paying sales tax must provide a “resale certificate” (AKA a “reseller’s license”) to the wholesaler.
This document proves that the retailer is registered with the state’s taxing authority to collect sales tax. If a retailer fails to provide a resale certificate, a wholesaler can (and should) refuse to sell to them without also charging sales tax.
Many wholesalers only sell to retailers, so if a retailer can’t show a valid resale certificate, they may be refused service.
Fun fact: A resale certificate is often the very same document as a sales tax permit, i.e. the state-issued document that shows you are legal to collect sales tax also shows that you are legal to buy items tax free at wholesale.
Here’s an example:
Riley Retailer purchases 50 pallets of paper towels from Williams Wholesale. Since Riley plans to sell the paper towels in their retail store, they do not need to pay sales tax on this purchase. But, in order for Williams Wholesale to be sure that Riley is a legitimate retailer, Riley must provide their resale certificate at the time of purchase.
Resale certificates are required simply to ensure that Riley Retailer isn’t really Sammy Scammer and trying to get away with buying items for personal use without paying sales tax.
Just like with everything sales tax related, resale certificates and the laws surrounding them vary by US state. Check out our “How to Use and Accept a Resale Certificate” post for more information.
Dropshipping from Suppliers and Sales Tax
Another situation in which sales tax might come into play in a wholesale situation is when a retail chooses to drop ship.
Drop shipping is when a retailer contracts with a third party, often a distributor or wholesaler, to send products directly to a buyer.
Here’s a common drop shipping business model:
Riley Retailer advertises and sells a fine selection of paper towels and napkins on their website. But, they only keep napkins in stock in their napkin warehouse. Whenever an order for paper towels comes in, they simply purchase the paper towels from their supplier, Debbie Dropshipper, and have Debbie actually ship the product from their own warehouse to the customer. (And remember, for sales tax purposes, the customer is the end user and is usually the person who has to pay sales tax.)
In this case there are three things going on:
A customer buys the item from the Retailer
The Retailer then buys the item from their Drop Shipper (Distributor, Wholesaler, Factory, etc.)
The Drop Shipper then ships the item to the customer
In this case, if you are the retailer and your drop shipper has nexus in your state, they’ll be required to charge your sales tax on that purchase unless you present them with a resale certificate stating that the item you bought from them is legitimately for resale.
And if your customer is in a state where you have sales tax nexus, then you’ll be required to charge sales tax to your customer.
In other words, if you, a retailer, have a resale certificate, you should not be charged sales tax by your drop shipper. But, you still need to have and present a resale certificate in order to buy items tax free at wholesale from your drop shipper and have your drop shipper ship those items to your customer.
Drop shipping and sales tax is it’s own complex can of worms and you can read more about drop shipping and sales tax here.
I hope this has helped answer any questions you have about wholesale sales and sales tax. If another question springs to mind, start the conversation in the comments!
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Watch the videoWhat does wholesale mean? Is it purchasing in bulk and at lower prices? What else is there to it?
Whether you’re a retailer looking to broaden your product procurement channels, or a manufacturer hoping to acquire a new sales avenue, you’ll come across the term “wholesale” at some point.
In this post, we’ll dive into the definition of wholesale, its different types, and key terms.
To understand wholesale, you need to consider what it means from different points of view.
Traditionally, for retail stores, buying wholesale means acquiring goods for your business in large quantities, at lower prices. You would then stock these items in your store and resell them to the end customer (individual consumers).
From the vantage point of a manufacturer, selling wholesale would put you at the other end of the process, where you would offer your products in bulk to a middleman (known as a distributor, but more on this later) or directly to retail stores.
It’s important to note that even though nearly all wholesale definitions talk about bulk orders, this is not a rule that’s carved in stone, although it is very often the case. There are wholesalers (usually manufacturers themselves) who are happy to sell their items in smaller quantities, especially when they’re dealing with a retailer for the first time.
For instance, some suppliers listed on Faire have no minimum order requirements.
You can shop wholesale products with no minimum order on marketplaces like Faire.Wholesalers buy goods from manufacturers or producers in bulk and resell them to retailers. Basically, they’re middlemen between manufacturers and retailers, offering bulk products at a discount.
Distributors acquire products in large volumes from manufacturers and then sell them off (also in bulk) to retailers. They play no role in the production process of the merchandise. Oftentimes, they also own their own storage facilities to hold these products.
Distributors are less known to the public. Sysco, for example, is a distributor that sells food products. If you run a restaurant or health care facility, you know of Sysco. If not, you may not even know they exist.
In some cases, wholesalers are manufacturers who make the goods themselves. Manufacturers selling wholesale products are both suppliers and makers, so they can sell to distributors or deal directly with retailers.
Ashland Conveyor Products, for example, manufactures and sells specialized conveyor equipment and material-handling solutions through its ecommerce site.
Manufacturer and supplier Ashland Conveyor Products sells through its own online store.In the context of wholesale, both distributors and manufacturers are suppliers, which are essentially businesses retailers source their products from.
Beyond wholesale, however, a manufacturer may not necessarily be a supplier. Wholesale suppliers typically engage in B2B (business-to-business) ecommerce—that is, they sell to other businesses (like a distributor or a retailer). Meanwhile, some manufacturers also sell B2C (business-to-consumer). In such cases, they would not be considered suppliers.
TKB Trading is a good example of a supplier. Since 1997, the brand has sold materials for cosmetic products, especially for those looking to create their own makeup line. It provides pigments, bases, and other ingredients.
Supplier TKB Trading homepage featuring Halloween products.Merchant wholesaling is what most people think of when coming across the term “wholesale.” It’s the most popular method of wholesaling, which involves a distributor purchasing goods in volume from a supplier/manufacturer, storing them in their own facilities, and then reselling them in smaller bulk quantities to retailers.
Since they’re distributors, merchant wholesalers do not produce the goods themselves. They also tend to specialize in certain types of products, which makes them very knowledgeable about the merchandise they trade.
A broker or agent is an independent intermediary, just like a merchant wholesaler. They don’t buy goods from manufacturers, though. Agents and brokers don’t own any of the wholesale products they deal in, unlike merchant wholesalers.
Their job is to set up deals between wholesalers and businesses interested in buying from them (like distributors or retailers) while making a commission—like real estate agents.
Brokers and agents are mostly used by manufacturers/suppliers who don’t have the financial power to handle their own sales.
This type of wholesale selling is similar to wholesale agents and brokers in that they are in charge of securing buyers for the manufacturer and have a vested interest in doing so.
However, these sales and distribution teams are not separate entities. They’re owned by the manufacturer themselves and are responsible for distributing the merchandise on a wholesale level (to distributors or retail stores). The offices of a manufacturer’s sales and distribution teams are usually kept physically apart from the production plant.
“Wholesale price” refers to the cost at which retailers would secure their goods when buying in bulk from a wholesaler. As mentioned above, because wholesalers can also be distributors, “wholesale price” also refers to the price distributors pay manufacturers to procure their products in large volumes.
Wholesale prices are always lower than the retail prices a store sets for its consumer. That’s because businesses markup the wholesale price in order to make a profit from the end-sale transaction.
Manufacturers or distributors are able to set their wholesale prices at a reduced rate because of volume buying. This lowers the time and costs involved in the handling/production of each unit, which, in turn, boosts profits.
A wholesale candle supplier or manufacturer offers its candles in large volumes at a wholesale price of $19 per unit to a business selling home décor products.
After purchasing from the wholesaler, this retailer then re-sells these candles at $26 per unit to its customers, pocketing $7 in profit for every candle sold.
One of the easiest methods to decide on a retail price is via keystone pricing. It’s a simple strategy that basically involves doubling the wholesale price.
In most cases, it’s a safe way to ensure all business costs are covered and allow for a healthy profit margin at the same time.
In essence, this is how keystone wholesale pricing works:
That said, as straightforward as this strategy is, it may not be optimal for all types of business.
For instance, it’s recommended for new candle businesses to list their products at a 25% to 50% markup, while the markup for clothing retailers can range from 100% to 300%.
That’s because the amount of markup a retailer needs to add to earn a profit depends on a host of factors that can vary greatly, according to the product, market, and wholesaler. These include:
In 2022, wholesale trade in the US brought in nearly $6.4 trillion in revenue. Selling bulk can bring many financial benefits for wholesale businesses, including:
Overall, wholesalers can operate with more freedom and control in the supply chain, which makes them more efficient and productive. They influence product quality and can choose the manufacturers and suppliers to work with.
As with every industry, wholesales comes with a few challenges you’ll face:
Knowing these challenges is important for sustaining a wholesale business. With the right strategies, you can navigate these challenges and thrive in your market.
If you’ve previously done some research on wholesale, you may have come across certain terms and acronyms that look foreign to you. Even though the world of wholesale is new to you, these terms are easy to understand.
Plus, if you’re serious about wholesale—regardless of whether you’re looking to sell or purchase—you’ll need to get yourself acquainted with them.
MOQ in wholesale stands for “minimum order quantity.”
Even though it’s not always the case, most wholesalers require a minimum number of unit orders from a buyer to be able to offer their prices at wholesale (lower) rates.
MOV is “minimum order value” and its concept is similar to MOQ.
The difference between MOV and MOQ is that the latter deals with unit quantities (e.g., an order for at least 500 units of candles), while the former refers to order amount in dollars (e.g., an order of at least $2,000 worth of candles).
Both MOVs and MOQs can vary greatly, depending on the manufacturer/distributor you work with, the product, and the sector you’re in.
Tip: As a retailer, if you’re using online wholesale marketplaces to source for suppliers, make sure to check whether their directories provide details on minimum orders for you to sort, filter, and make an informed decision.
MSRP refers to the manufacturer’s suggested retail price.
This is the price a wholesaler recommends its products be sold at by the retail business to the end consumer (i.e., the price listed in the retail store), which is higher than the wholesale price, as it takes into consideration markups by retailers.
Note that this is only a recommendation and it is up to retailers to decide whether or not they want to abide by it.
For instance, they are free to list their prices higher than the MSRP for products in high demand to boost profits, or set them lower during sale seasons.
The MSRP is also commonly referred to as the RRP (recommended retail price).
White or private labeling is when a store agrees with a manufacturer to sell its product(s) under the retailer’s brand name and logo.
This can either be for wholesale items that the manufacturer is already producing or a new product that the retailer commissions the manufacturer to develop. In both cases, the retailer would almost always have exclusive rights to the product(s).
A good example of a private label brand is Nardo’s Natural. The company specializes in organic skin care products and has created a separate website just for private label business. On the site, it helps with everything from conception to the creation of your skin care products.
“Wholesale only” is a term suppliers use when they’re selling only B2B and not to the general consumer.
Back orders refer to purchases from retailers that have been placed but are yet to be shipped. This is usually due to the lack of inventory from the wholesaler/manufacturer.
Buybacks take place when a wholesaler re-purchases unsold products that were originally bought by the retailer.
Conditions for buyback are usually set in advance and agreed upon by both parties. This includes time limit, re-purchase price, circumstance, and more.
A purchase order is a document containing the details of the items being purchased.
It usually includes:
A purchase order is used to generate an invoice.
This refers to a type of payment plan agreed upon by the retailer and the wholesaler.
It allows the retailer to make payment only after having received the goods and time to sell them.
The most common payment terms are 30, 60, and 90 days, although it can also be as short as seven days and as long as 180 days.
A consignment is a special arrangement between the retailer and wholesaler in which the retailer only pays for the products after they’re sold.
Under this arrangement, retailers do not purchase the items from the wholesaler. Instead, they simply place the manufacturer’s merchandise in their store and take a small cut from any sales that may happen.
Any unsold products are returned to the wholesaler.
Lead time is the length of time between the moment a retailer places an order with a wholesaler and the goods’ arrival.
This is also known as turnaround time.
It’s clear selling wholesale is a lucrative opportunity for any online retailer. Shopify is built to streamline the B2B sales process with a robust set of tools for managing inventory, processing bulk orders, and maintaining customer relationships.
You can create a password-protected wholesale page on your ecommerce site, or you can integrate with wholesale marketplace Faire to reach a wider audience and sell in bulk online.
In wholesale, goods are sold in bulk, usually for resale by retailers instead of direct to consumers.
Wholesale is when products are sold in bulk to retailers, who then sell them to consumers. Retail businesses sell directly to end users, often in smaller quantities.
In wholesale, goods are sold in bulk to businesses or retailers at a discount, so they can sell them to customers. An example would be a clothing manufacturer selling a lot of clothes to a clothing store or a farmer selling a lot of produce to a supermarket.
Amazon is mainly a retail platform that sells to customers. However, through its Amazon Business program and various other segments, it also offers wholesale-like opportunities for businesses to sell in bulk.