Why do suppliers need a SSN or EIN?

Time for some more Business 101. When you set up a new account with a supplier they should ask for your SSN (if you are a sole proprietor) or your business’ Employers Identification Number (EIN). An EIN is basically your business’ social security number. If they don’t ask for one of these, beware, it could be a red flag that something isn’t right.

Here’s what’s going on. In this country (USA) sales tax must be collected on every consumer sale. Yes, I said consumer sale. The end user, or the person buying the item for their personal use, must pay sales tax. However all the sales in between do not need to be taxed (i.e. selling the item from the manufacturer to distributor, distributor to retailer). Follow me so far?

The IRS requires all of us to track these sales so they can make sure the correct tax is being collected and paid. So, when your supplier sells you an item, they report to the IRS that the item was sold to another business for the purpose of resale. This tells the IRS that a sale was made, but it wasn’t to a consumer. The burden to collect and pay the tax on the item now comes to you, the retailer. Suppliers (or manufactures, or distributors) use your SSN or EIN to prove that they sold the item to a legitimate business and the IRS needs to look to you for the tax. Got it?

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