Imagine running a manufacturing company that regularly purchases large volumes of raw materials from nationwide suppliers. Further, imagine the manufacturer operates in multiple states. In an effort to manage cash flow and ease the administration of sales and use tax obligations, a purchaser may consider the concepts of direct pay permits.
Instead of paying sales tax upon the purchase of each separate transaction, especially when the manufacturer might use those materials differently than planned, a direct pay permit may allow you to provide a special permit number to your vendors. In turn, your vendors are no longer obligated to collect sales tax, and you, as the purchaser, handle it later by reporting and remitting directly to the state. This setup, known as a “direct pay permit,” can reduce administrative hassle, prevent overpayment, and improve cash flow for businesses that juggle complicated interstate purchases and transactions.
This article will examine how direct pay permits function in New York, Ohio, Texas, and California. We’ll examine each jurisdiction's process for issuing permits, discuss the practical steps buyers must take to ensure vendors are relieved of their obligation to collect sales tax, and explore why a purchaser might prefer to handle tax payments directly.
New York Direct Pay Permit Rules
In New York, direct payment permits allow businesses that cannot determine the taxable use of property or services at the time of purchase to remit tax directly to the state. Instead of charging sales tax at the point of sale, the seller accepts a valid permit, and the buyer later determines whether and how the purchase is taxable once used.
A direct payment permit is different from a sales tax exemption certificate. An exemption certificate allows a business to make tax-free purchases that would otherwise be subject to sales tax. For more information, see Tax Bulletin Exemption Certificates for Sales Tax (TB-ST-240).
To obtain a direct pay permit, a business files Form AU-298 and provides a statement outlining why the permit is necessary, which transactions will be covered, and how to track and pay tax on those purchases. Eligible applicants must:
- Be registered for sales tax purposes
- Maintain a place of business in New York State
- Have filed all required returns and paid all taxes due on time for the four preceding sales tax quarters immediately prior to applying for the permit (an exception applies to a new business that has not yet filed returns)
- Be unable to determine how otherwise taxable property or services will be used at purchase
The New York Department of Taxation and Finance will issue a designated numbered direct payment permit to an approved business for use when making qualifying purchases. Penalties, interest, and potential revocation can follow if a permit holder misuses the permit—such as using it to defer payment of clearly taxable items. For a detailed breakdown of the application process, eligibility requirements, and responsibilities of a permit holder, see New York Tax Bulletin ST-163 (TB-ST-163).
Direct Payment Permit Laws in Ohio
In Ohio, direct payment authority is governed by Ohio Revised Code (R.C.) 5739.031. This code permits a qualifying business to pay sales and use tax directly to the state rather than its vendors. The Ohio Department of Taxation grants this privilege to promote efficient sales and use tax administration.
A business interested in obtaining direct payment authority must demonstrate that it falls under circumstances where it cannot determine at the time of purchase if a transaction is taxable or exempt, such as a manufacturer or contractor uncertain about whether goods or services will be used in a taxable or exempt manner, or that it meets specified volume thresholds by making more than five thousand annual transactions or paying over $250,000 in Ohio sales and use taxes each year.
The prospective permit holder completes an application (Form ST_ST900_FI), submits it to the Ohio Department of Taxation, and provides a detailed description of its accounting system and operational flow to show how it will accurately record and remit sales and use taxes. Supporting materials typically include operational schematics, purchase record procedures, and a Taxpayer Information Report with corporate officers' or responsible parties' names and home addresses.
Once a business obtains direct payment authority, it furnishes either a copy of that authorization or a written notice listing each vendor's direct payment permit number, name, address, and issuance date. Upon receiving this information, the vendor no longer is obligated to collect Ohio sales tax on qualifying transactions since the permit holder is responsible for self-assessing and remitting any state or local tax owed.
If the permit holder suspects that a purchase is either clearly taxable (for example, a restaurant purchase, hotel lodging, or vehicle washing services) or that collecting tax at the time of sale would be more straightforward, the permit holder can choose not to invoke its direct payment authority. For a comprehensive overview, see ST203-01.
How Does Texas Address Sales Tax Direct Pay Permits
In Texas, direct payment authority is governed by Title 34, Part 1, Chapter 3, Subchapter O, Rule §3.288 of the Texas Administrative Code. Under this rule, businesses that meet certain purchasing thresholds and demonstrate reliable accounting methods may obtain a direct payment permit to acquire taxable items without paying sales tax at the point of sale. Instead, these permit holders are responsible for self-assessing and remitting the appropriate amount of tax directly to the Comptroller of Public Accounts.
To qualify, an applicant must purchase at least $800,000 annually in taxable items for its own use rather than for resale. Records showing the necessary purchase volume must support this eligibility threshold, and the applicant must submit a written statement confirming that it routinely exceeds the $800,000 annual taxable items mark.
Further, the applicant also needs to show that it can accurately distinguish taxable from non-taxable purchases through precise accounting methods. The permit application must accompany a concise description of these methods and a formal agreement to pay any tax due by the 20th day of the month following the period the purchase becomes taxable.
Once the permit is approved, the holder may give vendors a “direct payment blanket exemption certificate” instead of payment of sales tax for purchases of taxable items intended for the holder's own use. However, any item the permit holder later resells must be acquired using a resale certificate, not a direct payment exemption certificate.
The Comptroller’s rules also clarify several important restrictions: a direct payment permit holder may never issue these certificates to other entities, thereby “sharing” or “transferring” the permit’s benefits. By doing so, this can trigger revocation of the direct pay permit. In addition, the permit cannot be used on lump-sum construction contracts. Separated contracts may qualify, but only for taxable items that remain tangible personal property after installation, such as specific fixtures. Contractors cannot accept direct payment exemption certificates for consumables or equipment they will use, nor can the permit holder attempt to cover any nontaxable services provided by a vendor with the permit.
Overall, direct payment authority in Texas hinges on a clear distinction between taxable, nontaxable, and resale purchases, a strong recordkeeping system, and prompt self-remittance of taxes once the use of a purchased item becomes taxable. The rule underlines that misusing this privilege, whether by extending certificates to non-qualifying situations or failing to remit tax when due, can lead to loss of the permit and other penalties.
How Does a Direct Pay Permit Work in California?
In California, the issuance of direct payment permits is governed by Regulation 1699.5 under Title 18 of the California Code of Regulations. To qualify, an applicant must already hold a seller’s permit and have a robust accounting system capable of tracking and allocating the local portion of the assumed liabilities.
The CDTFA reviews whether issuing a direct payment permit will truly facilitate tax collection and serve “the mutual convenience of the board, the applicant, and the retailers,” typically requiring a high volume of both taxable sales and taxable purchases (exceeding $75 million in any calendar quarter during the previous 12 months).
In addition to proving the applicant’s financial stability and timely payment history, the application must include a certified financial statement and a detailed description of how the applicant will segregate and accurately report the taxes owed on these assumed liabilities. Once a complete application is submitted, the CDTFA generally responds within 60 days about approval or denial.
A direct payment permit holder continues to file regular returns but must keep the direct payment liabilities separate from the rest of its sales and use tax obligations. These returns are due on the last day of the month following each quarterly reporting period, and the permit holder must remit the assumed tax liabilities at that time.
If required under the applicable Revenue and Taxation Code provisions, prepayments must also be made separately, usually five days before the standard deadlines. This ensures that all direct payment accounts are settled promptly.
An additional responsibility for permit holders involves properly allocating local California sales and use taxes. Each direct payment return must be accompanied by a schedule allocating the local and district taxes to the specific cities, counties, or agencies where the original retailers would have otherwise reported those taxes. If a permit holder negligently or intentionally misallocates local or district taxes, a 10% penalty may apply.
Finally, any direct payment exemption certificate issued by the permit holder remains valid only for the calendar year it is issued. Permit holders must also file a separate return for their own taxable sales (if any) to distinguish between the liabilities they incur as sellers and those assumed from retailers under the direct payment authority.
Who Would Want a Direct Pay Permit?
Purchasers often seek a direct pay permit because it offers greater control and flexibility over tax remittance. Rather than relying on each vendor’s billing practices or risking tax audits for items used differently, a permit holder can consolidate all purchases under one system and determine taxability at the time of actual use.
This arrangement can simplify recordkeeping, reduce administrative errors, and improve cash flow by delaying tax payments until permit holders file their returns. It also eliminates the need to submit multiple exemption certificates to various vendors. Once the permit is on file, sellers are relieved from collecting sales tax, releasing the purchaser to manage its obligations.
Potential for Misuse
Direct pay permits carry significant risks if misused or neglected. One potential problem is failing to remit the tax once the permit holder determines a purchase is taxable. Because vendors do not collect the sales tax at the time of sale, an unorganized or understaffed accounting department may overlook items that should be self-assessed.
Another potential misuse issue arises when a permit holder applies the permit to ineligible transactions, such as using the permit for property or services that are definitively taxable at purchase rather than deferring the tax only when the use is uncertain.
Businesses must be vigilant about recordkeeping even when a transaction legitimately falls under direct pay authority. States generally require meticulous tracking of how property is ultimately used and in which jurisdiction.
The final tax calculation may be underreported if the permit holder’s system cannot consistently distinguish taxable from exempt uses. Repeated mistakes or missing documentation are red flags that lead revenue agencies to impose penalties, interest, and, in more severe cases, revocation of a company’s direct pay permit.
Contact Our Sales Tax Professionals
If you’re wondering how to apply for a direct pay permit, or if a direct pay permit can benefit your company, our experienced tax professionals are here to help. We will guide you through the application process and advise you on all requirements to remain compliant. Contact us today to discuss your options and how we can help your business with its tax needs.