When a Colorado business purchases inventory to resell, it can often do so without paying sales tax. To do so, the retailer needs to provide their vendor a Colorado Sales Tax Exemption Certificate.
Learn how the Colorado Sales Tax Exemption Certificate works, how to get one, and more.
How Does a Colorado Sales Tax Exemption Certificate Work?
When retailers purchase products to resell, they often don’t pay sales tax to the supplier. The sales tax will still be paid, but instead of the retailer paying sales tax, the retailer charges sales tax to their customer on the final value of the merchandise.
For instance, let’s consider a ski equipment store in Aspen, Colorado. When the store buys ski gear to sell, the store owner can typically avoid paying sales tax on their inventory purchases by presenting their sales tax exemption certificate to their vendor. When a customer purchases a pair of skis from the ski equipment store, the retailer adds Colorado’s sales tax to the total price. Then, at the end of a given period, typically the end of the month, the ski equipment store will add up all the sales tax it has collected from its customers. The store will then send this collected sales tax to the Colorado Department of Revenue.
Be aware that the sales tax exemption is only intended for inventory that will be resold and not for the tax-free purchase of items used in normal business operations, such as paper, pens, etc.
How To Fill Out the Colorado Sales Tax Exemption Certificate (Form DR 0563)
Before a business starts selling tangible personal property (physical products) or providing taxable services, it must first get a Colorado Sales Tax License (sometimes called a seller’s permit) from the Colorado Department of Revenue. After registering for the license, the Colorado Department of Revenue will provide a sales tax number, which will be used when filling out the Sales Tax Exemption Certificate.
Step 1: Begin by downloading the Colorado Sales Tax Exemption Certificate Form DR 0563 or filing through the Department of Revenue
Step 2: Identify the business name and business address of the seller
Step 3: Identify the name and business address of the buyer
Step 4: Check why the buyer qualifies not to pay sales tax. Options include:
- Wholesaler
- Retailer
- Manufacturer
- Charitable or religious
- Political subdivision or governmental agency
- Other (must specify)
Step 5: Describe the products to be purchased from the seller
Step 6: The purchaser will certify that the property is for resale and sign and date the certificate.
DR 0563 Sales Tax Exemption Certificate Form
Colorado Sales Tax Exemption Certificate FAQs
How much does a Colorado Sales Tax Exemption Certificate cost?
There is no cost for an Exemption Certificate in Colorado.
Does a Colorado Sales Tax Exemption Certificate Expire?
A seller must re-verify the purchaser’s resale license or tax exemption certificate each calendar year.
Where do I file the Colorado sales tax exemption certificate?
In Colorado, the certificate is not filed with any government agency. Instead, it is kept by the seller (the business selling the merchandise to the reseller).
Is a Sales Tax Exemption Certificate the same as a Sales Tax License?
No – The Sales Tax License and Sales Tax Exemption Certificate are commonly thought of as the same thing, but they are actually two separate documents. The Sales Tax License allows a business to sell and collect sales tax from taxable products and services in the state, while the Exemption Certificate allows the retailer to make tax-exempt purchases for products they intend to resell.
Your business may also need to register for additional items. For more information, check out our guide to Colorado business licenses.
What steps should a business take to accept an exemption certificate?
When a business is presented with a resale certificate, the seller has the burden of proof to verify that the buyer’s information is correct and to keep these records. Failing to verify this information may make the seller liable for Colorado sales taxes.
To verify whether a Colorado exemption certificate is valid
– Review the certificate to make sure it is completely filled out.
– Verify the purchaser’s Colorado Sales Tax License by visiting the Colorado Department of Revenue’s website and clicking the “Verify a License or Certificate” link.
– Sellers are also responsible for considering whether the goods and services sold are consistent with the purchaser’s claim that the sale is exempt from sales taxes if the purchases are over $250. For example, if the buyer’s business is a car dealership but wants to purchase office supplies tax-free, the seller should investigate further.
– Keep a file of exemption certificates.
More information regarding the documentation of exempt sales is available from the Colorado Department of Revenue – 1 CCR 201-4.
