If you run an Ecommerce or CPG business in Colorado, securing a Colorado Resale Certificate is a smart move to protect your margins and streamline operations.
This certificate allows you to purchase inventory and raw materials tax-free, helping you lower upfront costs, stay competitive in pricing, and remain compliant with Colorado sales tax laws.
Understanding Resale Certificates in Colorado
What is a Colorado Resale Certificate?
In Colorado, a Declaration of Wholesale or Entity Sales Tax Exemption is a document issued by the Colorado Department of Revenue (CDOR) that allows businesses to:
- Purchase goods without paying sales tax, provided these goods are intended for resale to their customers in the normal course of their business.
- Make tax-exempt purchases of inventory and materials that will become part of the products they sell by presenting a valid resale certificate to their suppliers.
The purpose is to prevent double taxation once at the wholesale level and again at the point of retail sale.
However, a Colorado resale certificate is not a blanket exemption from all sales tax obligations. Businesses are still required to collect and remit sales tax on taxable sales to end consumers.
Why do you need a Colorado Resale Certificate?
Obtaining a resale certificate in Colorado offers several significant advantages for businesses that purchase goods for resale.
Here are some key benefits:
- Avoid Paying Sales Tax on Inventory: The most direct benefit is purchasing inventory and materials that will be resold to customers without paying Colorado’s sales tax upfront.
- Maintain Competitive Pricing: By not paying sales tax on the cost of goods, businesses have more flexibility in setting competitive prices for products in the Colorado market. This can be a crucial advantage, especially in price-sensitive industries.
- Legal Compliance: Possessing and using a valid resale certificate for eligible purchases ensures businesses comply with Colorado’s sales tax laws and regulations to avoid penalties. Crucially, vendors must keep copies of valid resale certificates on file to justify why they did not collect sales tax on a particular sale. This shifts the burden of proof to the purchaser if the CDOR later questions the exemption during audits.
In Colorado, the specific form to declare eligibility for a resale exemption is the DR 5002.
When filling out DR 5002, a purchaser must include their Colorado taxpayer number to identify that it is registered with the CDOR and authorized to make tax-exempt purchases for resale.
Resale Certificate vs. Sales Tax Permit: What’s the Difference?
A Colorado Sales Tax Permit authorizes your business to collect and remit sales tax on taxable sales to customers. On the other hand, a Colorado Resale Certificate (DR 5002) allows you to purchase goods tax-free from suppliers if those goods are intended for resale.
To use a resale certificate, you must have an active sales tax permit. Note that in Colorado, a sales tax permit is generally referred to as a “sales tax license.”
Who Can Use a Resale Certificate in Colorado?
Businesses that purchase goods for resale can use a Colorado Resale Certificate. To do so, the business must actively sell taxable tangible products and hold a valid Colorado Sales Tax License.
How to Get a Resale Certificate in Colorado: A Step-by-Step Guide
Getting a resale certificate in Colorado is simple, but you’ll need to meet a few key requirements first. Here’s how to do it:
1. Make Sure You’re Eligible: Your business must sell taxable goods or services and be registered with the Colorado Department of Revenue (CDOR). Only businesses with a valid Colorado Sales Tax License can use a resale certificate.
2. Get a Colorado Sales Tax License: If you don’t already have one, apply for a Colorado Sales Tax License through the CDOR website. This License is required to complete the resale certificate.
Need help? Read our blog: How to Get a Seller’s Permit in Colorado
3. Provide a Valid Sales Tax Permit License: Businesses outside of Colorado without a sales tax nexus in the state do not need a Colorado Sales Tax License. Instead, you can present a valid resale certificate or sales tax permit from your home state to Colorado vendors.
However, if your business has a sales tax nexus in Colorado, you must register for a Colorado sales tax license. This is mandatory to make tax-exempt purchases for resale in the state using DR 5002.
4. Gather Your Business Information: You’ll need basic business details to complete the resale certificate, including:
- Your business legal name and any trade names.
- Your business address and contact information.
- Your Federal Employer Identification Number (FEIN) or Social Security Number (SSN) if you’re a sole proprietor.
- Your Colorado sales tax license number (if already obtained)
- Your home state’s sales tax permit number (for out-of-state businesses)
- Your business type (e.g., sole proprietorship, LLC, corporation)
5. Complete the DR 5002: Download and fill out the Colorado Resale Certificate (DR 5002) from the Colorado Department of Revenue’s website. You’ll present this form to your suppliers when making tax-exempt purchases.
6. Submission: No submission required in Colorado. You don’t submit the resale certificate to the state. Instead, give the completed form directly to your suppliers when buying items for resale.
7. Pay Any Applicable Fees: There’s no cost to use Form DR 5002, but you’ll need a valid Colorado Sales Tax License. To see if there’s a cost for the license, check out our guide on Sales Tax Permit fees.
8. Understand Renewal Requirements: In the Form DR 5002, you will see a mandatory field labelled “expiration date” under the sales tax license number. You’ll find this in the upper right corner of the form. This indicates that the DR 5002 is only active as long as your sales tax permit is also active.
If necessary, renew your sales tax permit or license to maintain your ability to make tax-exempt purchases for resale.
How to Use a Colorado Resale Certificate
To properly utilize your resale certificate in Colorado when making tax-exempt purchases for resale, you’ll need to present a valid copy of your Colorado Resale Certificate to your supplier at the time of purchase.
Colorado generally accepts resale certificates issued by other states.
- Good Faith Acceptance: Vendors in Colorado will typically accept an out-of-state resale certificate in good faith, provided it contains all the necessary information (buyer’s name, address, seller’s permit number from the issuing state, reason for exemption, etc.)
If you are an out-of-state business purchasing from a vendor in Colorado and plan to use your home state’s resale certificate, be prepared to provide it at the time of purchase.
However, note that Colorado vendors have the option to decline alternative resale certificates. This is to avoid being subject to a greater burden of proof when accepting forms other than the DR 5002. With that in mind, contact your Colorado supplier ahead of time to confirm their policy on accepting out-of-state certificates.
For more information regarding sales tax exemption laws in Colorado, you may read the state’s Code of Regulations.
Multi-Jurisdictional Resale Certificates
A standardized multi-jurisdictional resale certificate simplifies tax-exempt purchases for businesses that operate and make purchases for resale across state lines.
Unlike a standard resale certificate issued by a single state, a multi-jurisdictional certificate seeks recognition and acceptance by multiple states as valid proof that the buyer intends to purchase the goods for resale and is therefore exempt from sales tax at the time of purchase.
However, it’s crucial to understand that not all states accept these multi-state forms, and acceptance can come with specific conditions.
There are two primary types of multi-jurisdictional resale certificates that a business operating in or selling to vendors in Colorado might encounter:
- Uniform Sales & Use Tax Resale Certificate – Multijurisdiction Form: This is a widely recognized form accepted by a significant number of states (though not all). Colorado accepts the form, but it cannot be used for the resale of taxable services.Additionally, you must include your Colorado Sales Tax License number to complete the form properly. Out-of-state purchasers should include their home state’s registration number. You can find this form on the Multistate Tax Commission (MTC) website.
- Streamlined Sales Tax (SST) Certificate of Exemption: Colorado is not a member of the Streamlined Sales Tax Governing Board. Therefore, while a Colorado vendor might accept an SST Certificate of Exemption, they are primarily looking for a Colorado Resale Certificate (DR 5002) or the Uniform Sales & Use Tax Resale Certificate.You can find more information about the SST and its member states on the Streamlined Sales Tax Governing Board website.
As stated on Colorado’s official website, alternative resale certificates are allowed. This includes the Uniform Sales & Use Tax Resale Certificate by the MTC.
Despite this confirmation, it’s still best to verify which certificates your Colorado suppliers are willing to accept. This practice ensures seamless transactions and helps avoid audit issues.
Responsibilities When Using or Accepting a Colorado Resale Certificate
Buyer Responsibilities
If you’re using a Colorado resale certificate, you must ensure you use it only for purchases of goods or services you intend to resell. Using it for personal or operational items (like office supplies or equipment) is illegal and may lead to penalties.
- Colorado-based buyers: Provide a fully completed Form DR 5002 to your suppliers for qualifying purchases. Ensure you use your 8-digit Colorado Account Number (CAN), which is your primary business tax ID.
- Out-of-state buyers: If your business has a sales tax nexus within Colorado, you are generally required to register with the Colorado Department of Revenue. This grants you a Colorado Sales Tax License, which you need to complete a Form DR 5002. Alternatively, you may also provide your home state’s sales tax permit number in the form if you do not have nexus in Colorado.In case you don’t have a valid sales tax permit, you generally cannot claim a resale exemption. If your business does not genuinely need to register for sales tax in any state, you must confirm with your Colorado supplier beforehand, as they may decline the transaction.
Seller Responsibilities
As a seller in Colorado, accepting a resale certificate comes with the responsibility of verifying and retaining proper documentation for tax-exempt sales. You must:
- Accept the certificate in good faith
- Verify the certificate’s validity by checking the sales tax license number and keep a record of the license’s expiration date. This is to comply with Colorado’s Code of Regulations.
- For recurring transactions, confirm that the sales tax permit number has not expired
- Ensure it includes all required information: buyer’s name, address, sales tax permit number (or equivalent), reason for exemption, and signature
- Ensure that you don’t use the certificate to claim sales tax exemption on resale of taxable services when you accept a Uniform Sales & Use Tax Resale Certificate.
- Reject the certificate if the items aren’t for resale (e.g., personal or business use)
Keep records for at least 3 years: A properly completed resale certificate is your official proof of why sales tax wasn’t collected. You must retain it in your records for at least 3 years in case of a sales tax audit by the Colorado Department of Revenue.
Frequently Asked Questions About the Colorado Resale Certificate
Are There Penalties for Misusing a Colorado Resale Certificate?
Yes. Misusing a Colorado resale certificate may result in a sales tax penalty of $15 or a percentage of the amount due equal to 10%. The CDOR adds an additional ½ % for each month the due tax is unpaid. This penalty shall not exceed a total of 18%.
In severe cases, false or fraudulent statements by any retailer can lead to a Class 5 Felony charge. Verifying false statements can also result in a Class 2 misdemeanor. Learn more via the Colorado Department of Revenue.
Does a Colorado Resale Certificate Expire?
The resale certificate (DR 5002) expires along with the user’s seller’s permit. As long as your Colorado Sales Tax License is active, the resale certificate remains valid. The same rule applies when using any state’s sales tax permit when completing the form.
How Do I Verify a Resale Certificate in Colorado?
To verify a resale certificate in Colorado, follow these steps:
- Request a completed DR 5002 or any completed resale certificate from the buyer.
- Locate their 8-digit Colorado Sales Tax License Number on the form.
- Use the “Verify a License or Exemption Certificate” option in the Colorado Revenue Online and enter the license number. Read the instructions on the page carefully.
How TaxHero Can Help
You don’t have to complicate managing sales tax compliance and resale certificates in Colorado. TaxHero simplifies the process. From keeping your Colorado Sales Tax License active to ensuring you use resale certificates correctly.
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Schedule a Demo to see how TaxHero can streamline your resale certificate in Colorado process today!