City and County of Denver, Colorado

TAX GUIDE

Topic No. 86

WHOLESALE SALES AND WHOLESALE DEALERS

 

Generally, the retail sale or purchase of articles of tangible personal property, not otherwise exempt, is subject to sales or use tax.  Wholesale sales, however, are not subject to sales/use tax.

 

WHOLESALE SALES INCLUDE:

 

1.         Sales by wholesalers to licensed retail merchants, jobbers, dealers, or other wholesalers for resale. 

Note:  Wholesale transactions are limited to items to be resold by a purchaser.

 

2.         Sales to a purchaser engaged in the business of manufacturing or compounding for use, profit, or sale tangible personal property which meets all of the following conditions:

 

a.              It is actually transformed by the manufacturing process;

 

b.              It becomes, by the manufacturing or compounding process, a necessary and recognizable ingredient, component and constituent part of the finished product; and

 

c.              Its physical presence in the finished product is essential to the use thereof in the hands of the ultimate consumer.

 

3.         Sales for use as containers, labels, and shipping cases which meet all of the following conditions:

 

a.              It is used by the manufacturer, compounder, wholesaler, jobber, retailer, packager, distributor, or bottler to contain or label the finished product;

 

b.              It is transferred by said purchaser along with and as a part of the finished product to the ultimate consumer; and

 

c.              It is not returnable to said purchaser for reuse.

 

WHOLESALE SALES DO NOT INCLUDE:

 

1.   A sale by wholesalers to users or consumers not for resale.  This would include any merchandise sold to wholesalers for their own use.  A purchaser who provides the vendor a copy of their sales tax license is not exempt on purchases not resold.  Sales taxes must be paid on all purchases for business or personal use.  Except for withdrawals from resale inventory, the buyer does not have the option of later paying consumer use tax on purchases for business or personal use.

 

2.   The leasing, hiring, renting of, or granting of a license to use tangible personal property to a user or consumer thereof (including royalty agreements).

 

 

 

 

 

3.   Sales of returnable containers to manufacturers, compounders, wholesalers, retailers, jobbers, packagers, distributors, or bottlers.

 

4.       Sales of tangible personal property to persons for resale when there is a likelihood that the City will otherwise lose tax revenues due to the difficulty of collecting the applicable taxes.

 

BURDEN OF PROOF:

 

In order for a wholesale sale to be valid, the seller must exercise care and good faith to insure the product sold is of a type normally resold, leased, rented, or incorporated as an ingredient or component part of a product manufactured by the buyer and then resold in the usual course of business.  It is the seller’s responsibility to collect sales tax in any questionable situations.  The purchaser can then apply to the City within 60 days for a refund of any taxes paid in error.

 

The following typically shows the exercise of care and good faith:

 

1.       The purchaser must be able to resell the product being purchased.  This could be evidenced by the vendor maintaining a file of copies of purchasers’ applicable, valid sales tax licenses; and

 

2.       The purchaser must be substantially engaged in reselling products like those being purchased.  The seller, in order to make a wholesale sale, must know the nature of the purchaser’s business, and that the purchase probably will be resold.  In some situations, industry standards may be that a product is typically not resold, but in some situations could be resold.  In these situations, in order to assist the seller in ascertaining the nature of the purchaser’s business, the seller should require a Resale Clarification Form containing a statement that the specific property is being purchased for resale in the normal course of business.  However, if the seller cannot ascertain the nature of the purchaser’s business, tax should be charged and the purchaser should request a refund directly from the City.

 

EXAMPLES

 

1.   AAA Distributors sells white T-shirts to Joe's T-Shirt Shop located in Denver. Joe's T-Shirt Shop then silk screens pictures on them and sells them to customers.

 

The transaction between AAA Distributors and Joe's T-Shirt Shop is a wholesale sale and is not taxable.  The transaction of purchasing paint, which is used in the silkscreen process, is also a wholesale sale and is not taxable.  The sale transactions between Joe's T-Shirt Shop and its customers are retail sales and Denver sales tax applies.

 

2.   ABC Box Company sells specially designed clothing boxes to three Denver vendors: Major Department Store, XYZ Moving and Storage, and the Little Package Store.  The boxes sold to Major Department Store are used to package the products they sell, are not returnable, and their costs are included in the selling price of items Major Department Store sells at retail.  The boxes sold to XYZ Moving and Storage are used in performing the moving and storage services and are not separately invoiced to its customers.  The boxes sold to the Little Package Store are resold to its customers.  Both Major Department Store and the Little Package Store have Denver retail sales tax licenses.

 

ABC Box Company will not tax the sales to Major Department Store or the Little Package Store.  These are wholesale sales because the Major Department Store uses the boxes to contain items it sold at retail and the cost is included in the selling price.  The Little Package Store sells the boxes at retail and collects the sales tax from its customers.  ABC Box Company would tax XYZ Moving and Storage since XYZ Moving and Storage does not have a retail sales tax license and does not subsequently make retail sales of the boxes.

 

 

 

 

3.   Fast Freddie’s Used Cars, which holds a resale license in Denver, goes to ABC Computer Sales and Service to purchase a desktop computer.  Fast Freddie provides a copy of its resale license and states that it is “buying for resale”.

 

Since Fast Freddie is in the used car business, ABC cannot in good faith make the determination that Fast Freddie will resell the computer.  Therefore, Denver sales/use tax must be charged on the transaction.  Fast Freddie may request a refund from the City if it believes the purchase is indeed for resale.

 

4.   Sam’s Supply sells parts, supplies, and tools to customers in the heating, ventilation, and air conditioning (HVAC) industry.  Harry’s Heating comes in and purchases a thermostatic control module, a bottle of leak detector fluid, and a wrench.  As part of its credit approval process, Sam’s Supply has a copy of Harry’s Heating’s current sales tax license on file, and Harry’s Heating has been a regular customer for some time and is known to be in the business of repairing heating systems. 

 

Harry’s Heating can purchase the thermostatic control module as a wholesale purchase, since it will resell this item in the normal course of its business.  However, Harry’s Heating must pay sales tax on the bottle of leak detector (a supply used in the business) and the wrench (a tool used in the business).  The supplies used in the business would be taxable even if Harry’s Heating bills a generic line item of “supplies” on its invoices to its end customers.

 

5.        With the same situation as Example 4, Harry’s Heating states that its internal procedure is that all its repairmen must purchase the tools that they use on the job.  Therefore, as a normal part of its business, Harry’s Heating sells any tools issued to its repairmen, with or without a markup, and charges sales tax on these sales.  Typically, a HVAC repair shop would purchase tools for its own use, and owe sales/use tax on these purchases.  However, some HVAC shops account for tools by selling them to its repairmen.  Therefore, the tools can be sold tax-free for resale to Harry’s Heating, but Sam's Supply should require Harry’s Heating to complete and sign a Resale Clarification Form, stating it they specifically sell tools to its repairmen, and keep the form on file at least 4 years.

 

 

ATTACHMENT:  Resale Clarification Form for Denver Sales Tax

 

 

RELATED TAX GUIDE TOPICS

Exemption – Burden of Proof

Refunds and Credits

 

* DRMC Section 53-24(27).                Definitions - Wholesale Sale – Sales.

* DRMC Section 53-24(28).                Definitions - Wholesaler – Sales.

* DRMC Section 53-28(c).  Retailer responsible for payment of tax – Sales.

* DRMC Section 53-43.                       Refund Procedure – Sales.

* DRMC Section 53-95(31).                Definitions - Wholesale Sale - Use.

* DRMC Section 53-95(32).                Definitions - Wholesaler – Use.

* DRMC Section 53-99(c).  Retailer responsible for payment of tax – Use.

* DRMC Section 53-111.                     Refund Procedure – Use.

 

 

 

 

 

THE ABOVE INFORMATION IS A SUMMARY IN LAYMAN’S TERMS OF THE RELEVANT DENVER TAX LAW FOR THIS INDUSTRY OR BUSINESS SEGMENT.  IT IS NOT INTENDED FOR LEGAL PURPOSES TO BE SUBSTITUTED FOR THE FULL TEXT OF THE DRMC AND APPLICABLE RULES AND REGULATIONS.

 

 

Revised 12/02

RESALE CLARIFICATION FORM

FOR

DENVER SALES TAX

 
 

 

Purchaser Representation:

 

Company Name                                                                                                                                                          

 

Address                                                                                                                                                                     

 

City/State/Zip                                                                                                                                                             

 

Representative                                                          Title                                                                                              

                                                                                                          If no Denver ID;                                                                                                         

Denver Tax ID:                                                        State Tax ID:                                                                                  

 

Specific item(s) to be purchased for resale                                                                                                                   

 

                        True        False

                                                The organization named above is licensed to collect and remit sales taxes to the State of Colorado and, if necessary, the City and County of Denver.

 

                                                The items mentioned above will actually be resold in the normal course of business and are not for the use of the organization named above.

 

                                                I agree to reimburse the vendor for Denver taxes associated with this transaction if the City and County of Denver disallows the exemption upon audit or review

 

All of the above must be true for the purchase to qualify for exemption.

This form may be provided to the City & County of Denver.

 

The undersigned declares and affirms that the above statements are true and the above named company acknowledges its liability to the vendor for the tax in the event the transaction does not qualify for exemption.  (Attach a copy of the signer’s driver’s license or other appropriate form of photo identification)

 

 

Name                                                                                        Title                                                Date                   

 

Vendor Representation:

 

Important:  Use of this form does not relieve the vendor of its obligation to verify that all conditions for exemption have been met.  All exempt transactions are subject to audit, and the vendor may be held responsible for payment of taxes related to transactions exempted in error.

 

By signing below, I certify that I have sufficient knowledge of this purchaser’s business to believe the items described above will be resold and are not for the purchaser’s own use.

 

By:                                                                                                                                                                              

 

Printed Name:                                                                            Title:                                                                           

 

The City and County of Denver recommends retaining this document for at least four years subsequent to the transaction date.

 

Issue 12/02