In most transactions in the United States, merchants collect sales tax from buyers at the time of purchase. In some cases, however, companies prefer to pay their own sales tax later, often because it's unclear whether the transaction is fully taxable.
Large companies that often make mixed-use purchases can apply for a direct pay permit to shift sales tax compliance obligations. The permit is an official state authorization that lets the buyer avoid paying sales tax upfront and instead file and remit payment later.
There is no federal program for direct pay permits. Each state sets its own eligibility rules, but those guidelines are generally narrow, and permits are limited to large purchasers. The permit does not remove the sales tax obligation, but instead places the burden on the buyer.
Direct pay permits have the same practical effect for sellers as exemption certificates and resale certificates. The seller does not have to collect tax at the point of sale. However, the mechanism by which taxes are paid works differently for all three:
- When exempt buyers, such as nonprofits and government agencies, provide an exemption certificate, they typically never pay sales tax. The purchase is nontaxable, and no tax comes due on it later.
- When resellers provide a resale certificate, the end user ultimately pays the sales tax. The reseller purchases the goods without paying sales tax, sells them to consumers and charges sales tax, and the reseller files sales tax returns and remits payment.
- When direct pay buyers provide a direct pay permit, the buyer self-assesses and remits any sales tax due to the state once the final taxable use of the goods is known.
While resale and other types of exemption certificates are relatively common, eligibility for direct pay permits is limited, and most small and medium-sized businesses don't qualify.
This guide explains what direct pay permits are, why they exist, how they work, who qualifies, and how to apply for and maintain your permit. It also explains what to do if your company doesn't qualify.
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What is a direct pay permit?
A direct pay permit is also called a direct payment permit or direct pay authorization. It is an official state authorization that allows a qualified business to purchase taxable goods or services without paying sales tax at the point of sale.
Although the rules differ by state, as New York's rules explain, these permits may only be used if:
- The permit has been issued to an eligible business.
- The business is not able to determine at the time of purchase how the property or services will be used and thus whether the purchase should be taxable.
Direct pay permits shift the sales tax compliance obligation from the seller to the buyer, who must self-assess the tax due, file sales tax returns with the state, and pay the required amount.
These permits are not tax exemptions, but rather change when the tax is paid and who pays it.
Why direct pay permits exist
Direct pay permits exist to solve a problem created by the U.S. sales tax system. Merchants typically must collect sales tax at the time of sale and risk liability for uncollected tax. But it is not always clear if a good or service is taxable depending on its use.
The problem with sales tax at the time of purchase
Traditionally, in the U.S. sales tax system:
- A vendor charges sales tax if the item is taxable and the buyer is not exempt.
- The buyer pays tax based on the item's tax rate.
- The vendor files sales tax returns with the state and remits the tax.
However, in many cases, tax rules depend on how the item is ultimately used.
The problem is that business buyers often don't know up front exactly how they plan to use an item, so it's unclear at the time of purchase whether they should pay sales tax.
The company could pay the sales tax, then claim a credit later if the sale turns out to be exempt. But this is a slow, manual process that can lead to mistakes and ties up cash that was used to pay tax that isn't returned, sometimes for months.
A direct pay permit eliminates this process, allowing the buyer to purchase the items without paying sales tax, then to self-assess and pay the tax later once the use of the item, and thus its taxability, is determined.
Who actually needs a direct pay permit
Direct pay permits are used by high-volume buyers who engage in frequent mixed-use purchases. Some common examples include:
- Large retailers
- Manufacturers
- Construction firms
- Technology companies or software companies making purchases at scale
If these and other businesses routinely purchase items that are taxable in some use cases but not taxable in others, applying for a direct pay permit could be the right approach to managing sales tax.
Very few businesses experience this issue, and most states heavily restrict direct pay permits, so these permits are uncommon.
Typically, the company using the direct pay permit needs an accounting department to manage compliance accurately, and it should use the permit only for transactions where there is genuine uncertainty about how the purchased items will be used.
How a direct pay permit works
Once a buyer has received a direct pay permit, both the buyer and sellers must understand the implications of this permit on taxable transactions.
What happens during a transaction
When a buyer has a direct pay permit, here's how the process works:
- The buyer determines they will make a purchase but isn't certain how the items will be used or whether the purchase should be tax-exempt.
- The buyer presents the direct pay permit to the vendor.
- The vendor does not charge sales tax on the transaction.
- The buyer later determines whether the purchase was fully taxable, partially taxable, or exempt.
- The buyer files a sales tax return and remits tax owed directly to the state.
The buyer is ultimately responsible for ensuring the sales tax is paid. The vendor is not liable for the uncollected tax, provided the vendor keeps the permit on file. The vendor can present the permit in an audit to show why no tax was charged on the sale.
Numeral can help both the vendor and buyer by assisting buyers with sales tax registration, filing returns, and remitting payments, and by helping sellers manage exemption certificates so they are audit-ready.
An example
To better understand how direct pay permits work, let's look at an example.
In Connecticut, purchases of certain items by a manufacturing company may fall under three possible sales and use tax rates: 6.35%, 3%, or exempt from tax.
Let's say a manufacturer is purchasing a computer-controlled milling machine while in the process of expanding its facility. At the time of purchase, the company knows the machine will be installed somewhere in the facility but hasn't determined its final location.
Depending on where the machine is ultimately installed, it could be:
- Used directly on the production line and exempt from sales tax.
- Used in an activity qualifying for the 3% manufacturing rate, so it would be taxed at 3%.
- Used in a prototype or engineering area that doesn't qualify for manufacturing exemptions, so it would be taxed at 6.35%.
Since the proper tax treatment can't be determined at the time of purchase, the manufacturer would use the direct pay permit and then self-assess the amount of tax due later once the use of the machine was known.
What purchases are typically covered
While there is some variation by state, in general, direct pay permits can be used in transactions where a permit-holder is purchasing:
But since requirements vary by state, it is important to check the local rules. For example:
- In Iowa, the Department of Revenue explains that the "applicant must be a purchaser, user, or consumer of tangible personal property, specified digital products, or taxable services."
- In North Carolina, the Secretary of Revenue can issue direct pay permits for the purchase of "tangible personal property, certain digital property, certain charges or services, telecommunications service, direct mail, and a qualified jet engine."
- In Kentucky, direct pay permits may be used for "all purchases of tangible personal property and digital property, excluding energy and energy-producing fuels."
Both direct permit holders and vendors who accept these permits must check with the state to confirm that the transaction is an eligible one.
The buyer must also not know up front how the taxable property or services will ultimately be used.
What purchases are typically excluded
In some states, buyers are prohibited from using direct pay permits for specific types of purchases. For example, Washington's guidance specifies that direct pay permits cannot be used for specific kinds of purchases, including:
- Purchases for which a reseller permit may be used
- Purchases of meals or beverages
- Purchases of lodging and related services
- Purchases of motor vehicles, trailers, boats, airplanes, and other property subject to requirements for title transactions by the Department of Licensing
- Purchases of automobile towing services, and automobile parking and storage services
- Purchases of amusement and recreation services
- Purchases of abstract, title insurance, escrow services, and credit bureau services
- Service charges associated with tickets to professional sporting events
- Charges related to the use of an athletic or fitness facility
- Purchases of personal services such as tanning salon services, tattoo parlor services, steam bath services, Turkish bath services, escort services, and dating services
- Purchases of telephone services
Many states have similar exclusions, often excluding meals, lodging, titled vehicles, purchases eligible for resale, and personal services.
States share common exclusions, in part, because many jurisdictions have modeled their rule on the Multistate Tax Commission's Model Direct Payment Permit Regulation, which prohibits the use of direct pay permits on:
- Purchases of taxable meals or beverages
- Purchases of taxable lodging or related services
- Purchases of admissions to places of amusement, entertainment, or athletic events, or the privilege of use of amusement devices
- Purchases of motor vehicles or other tangible personal property required to be licensed or titled with a taxing authority
- Purchases of enumerated services listed in each state's statutes, like telecommunications and utilities
However, states don't have to adopt these restrictions, and some impose broader limitations, as Washington does. Check each state's Department of Revenue to determine whether a direct pay permit can be used for specific purchase types.
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Direct pay permit vs. sales tax exemption certificate
Direct pay permits are very different from a sales tax exemption certificate.
- When an eligible buyer submits a valid sales tax exemption certificate, the buyer never owes sales tax on the transaction.
- When a direct pay permit is submitted, tax is still due on the taxable portion of the sale, but it is just paid at a different time, and the obligation to remit the tax shifts to the buyer rather than the seller.
The table below shows the distinction:
|
Exemption Certificate |
Direct Pay Permit |
| Tax owed? |
No |
Yes, on the taxable portion of the sale.
Buyer self-assesses and remits once it’s clear what tax is owed. |
| Who determines taxability? |
The vendor is responsible for doing due diligence to confirm the exemption is valid. |
The buyer determines internally after purchase or after the first use occurs. |
| Typical holder |
Nonprofits, resellers, and government entities |
Large buyers with mixed-use purchases |
Individual states typically make this distinction very clear. For example, the Texas Department of Taxation and Finance states:
"A direct payment permit is not the same as a sales tax exemption certificate. An exemption certificate allows a purchaser to make tax-free purchases that would otherwise be subject to sales tax."
Direct pay permits do not mean no sales tax is due. The buyer must pay sales tax at the correct rate on the taxable portion of the purchase once its use is determined.
Direct pay permit vs. resale certificate
Direct pay permits also differ from resale certificates, and many states prohibit using direct pay permits to purchase items for retail sale.
Resellers purchasing items to sell to consumers use resale certificates. Resellers purchase items tax-free, then collect sales tax from the end user or consumer. The reseller is then responsible for remitting the tax collected from the consumer to the state.
A direct pay permit is used when the buyer will ultimately be the consumer or end user of the item, but it is not yet clear whether the sale is taxable or not, as the tax rules depend on how the buyer ultimately uses the item or service.
As California law explains:
"A direct payment exemption certificate shall not be substituted for a resale certificate because the tax consequences are different. Resale certificates shall only be issued with respect to property which the purchaser intends to resell, and direct payment exemption certificates shall be issued only for property purchased for use or other consumption."
Who qualifies for a direct pay permit?
Individual states determine who qualifies for direct pay permits. However, eligibility is generally very limited to large purchasers who have frequent mixed-use purchases.
Typical requirements
Typically, a purchaser applying for a direct pay permit must:
- Demonstrate that it has an accounting system that is capable of accurately distinguishing taxable from nontaxable purchases
- Have a clear compliance history, as many states require a track record of on-time sales tax filings before approval
- Meet the state’s purchase volume or tax liability threshold, which varies widely by state
For example, New York states that you must have "filed all required returns and paid all taxes due on time for the four preceding sales tax quarters immediately before applying for a direct payment permit" in order to be eligible.
Does your business actually need one?
Most small and medium-sized companies, including the majority of ecommerce and SaaS businesses, do not meet the state thresholds for a direct pay permit, and they do not need this type of permit.
You only need a direct pay permit if:
- You regularly make purchases that may or may not be fully taxable.
- It is impossible to determine upfront whether many of the purchases are taxable or not.
- You don't want to pay tax on the full amount of taxable goods up front and claim a refund later.
Companies that do not qualify for a permit based on transaction volume or that don't regularly engage in these types of transactions can follow the standard sales tax compliance process.
This means submitting a valid resale or exemption certificate to the vendor, or paying the tax due at the point of sale. The vendor remains obligated to collect the full tax on the taxable transaction and must file and remit payment in these circumstances.
Direct pay permit rules and thresholds by state
Since each state sets its own rules for direct pay permits, the thresholds and requirements to qualify for a permit vary by location. The table below shows the rules for obtaining a permit.
State-by-state direct pay permit rules and application forms
The table below provides the current rules for obtaining a direct pay permit by state. State tax rules can change over time, so it is important to check with your state before applying to determine if you meet current eligibility rules.
Five states do not charge state sales tax, so no permit is required. Those states include Alaska, Delaware, Montana, New Hampshire, and Oregon.
| State |
Program Name |
Threshold/Eligibility |
Form |
Key Limits |
| Alabama |
Direct Pay Permit |
No specific dollar threshold found in state guidance |
Apply per Ala. Admin. Code 810-6-4-.14 |
Does not extend to construction contracts; monthly reporting through My Alabama Taxes |
| Arizona |
Use Tax Direct Payment Permit |
$500,000+ in own-use taxable purchases in the preceding calendar year |
Application under A.R.S. § 42-5167 |
Revocable for late filing or payment or for other noncompliance; permit holders are publicly listed |
| Arkansas |
Direct Pay Permit |
No specific dollar threshold found in state guidance |
Supplemental Application for Direct Pay Permit Authority, filed with ATAP registration |
Local tax reporting is capped at $2,500 of the taxable amount per invoice |
| California |
Use Tax Direct Payment Permit |
$500,000+ in taxable purchases in the preceding calendar year |
Form CDTFA-400-DP |
Local/district tax must be allocated correctly; the permit can be revoked if purchases fall below the threshold |
| Colorado |
Direct Payment Permit |
$7,000,000+ in Colorado sales/use tax-owed purchases in the preceding 12 months |
Form DR 0002 |
Threshold excludes exempt purchases; state-administered local taxes are handled separately |
| Connecticut |
Direct Payment Permit |
No specific dollar threshold found in state guidance; approved at the commissioner’s discretion |
Form AU-620 ($20 fee, approximately 120-day review) |
Never expires unless surrendered or revoked; not transferable |
| Florida |
Self-Accrual Authority / Direct Pay Permit |
No specific dollar threshold found in state guidance; approval is category-based |
Apply on Form DR-16A; permit issued as Form DR-16P |
Authorization is limited to the specific self-accrual category approved; must already hold an active Florida sales tax certificate |
| Georgia |
Direct Pay Permit Program |
More than $2,000,000 in tangible personal property purchases in the preceding 12 months (or a 36-month average above $2,000,000) |
Apply through the Georgia Tax Center |
Excludes lodging, admissions, short-term vehicle rentals, and local telephone service; holders waive interest on related refund claims |
| Idaho |
Direct Pay Authority |
No specific dollar threshold found in state guidance |
Written request to the Idaho Sales Tax Audit Bureau |
Valid for a defined period; renewal must be requested 45–60 days before expiration; four- to six-week processing time |
| Illinois |
Managed Compliance Agreement (Direct Payment Permit Program) |
No specific dollar threshold found in state guidance; negotiated case by case with the IDOR Audit Bureau |
Application through the IDOR Audit Bureau; monthly returns on Form ST-1 |
Annual transactional review required as of 2025; penalty up to $6,000 if fewer than 95% of reviewed transactions are correctly sourced |
| Indiana |
Direct Payment Authorization |
No specific dollar threshold found in state guidance |
Application for Direct Payment Authorization |
Issued for businesses with substantial purchases used for mixed exempt/nonexempt purposes |
| Iowa |
Direct Pay Permit |
Average monthly sales/use tax liability on consumed goods above $8,000 over the prior two years |
Apply via GovConnectIowa |
Multiple locations may combine liability if records are centralized; covers tangible personal property, specified digital products, and taxable services |
| Kansas |
Direct Payment Permit |
Annual purchases of at least $1 million of tangible personal property for business use or substantial purchases made under circumstances that make it difficult or impractical to determine taxability at the time of purchase |
Written application to the Kansas Secretary of Revenue |
Not transferable; may be revoked at any time for noncompliance |
| Kentucky |
Direct Pay Authorization (DPA) |
Purchased digital property or tangible personal property, excluding energy and energy-producing fuels, of at least $10 million for use in Kentucky operations during the preceding calendar or fiscal year, as applicable |
Application under 103 KAR 31:030 |
Requires a bond or indemnity agreement of $75,000 to three times the estimated monthly liability |
| Louisiana |
Direct Payment Number (DP Number) |
At least $5 million per year over the three prior calendar years; $10 million aggregate for nonprofit healthcare organizations per statute |
Application under La. R.S. 47:303.1 |
Renews automatically unless the state finds the holder no longer qualifies or becomes delinquent |
| Maine |
Direct Payment Permit |
No specific dollar threshold found in state guidance |
Application under Maine Revenue Services Rule 308 |
Applicant must hold a valid Maine Retailer Certificate and establish that its accounting methods clearly reflect the proper amount of tax due |
| Maryland |
Direct Payment Permit |
No specific dollar threshold found in state guidance; tied to an effective rate agreement with the comptroller |
Application under COMAR 03.06.01.31 |
Revocable at any time for noncompliance or misuse; must notify vendors of permit status |
| Massachusetts |
Direct Payment Permit |
No specific dollar threshold found in state guidance; geared toward companies expecting to remit $50,000 or more annually under a direct payment permit |
Application reviewed by the DOR Direct Payment Permit Program |
Requires computerized recordkeeping; not issued automatically |
| Michigan |
Direct Pay Permit (Treasury-authorized) |
No specific dollar threshold found in state guidance |
Submit a formal written application directly to the Michigan Department of Treasury |
Covers only the specific property or lease named in the Treasury authorization |
| Minnesota |
Direct Pay Authorization |
No specific dollar threshold found in state guidance; based on purchase volume and administrative burden reduction |
Application reviewed by the Minnesota Department of Revenue |
State no longer issues physical permits; authorization comes as a letter and cannot be used for amusement or athletic admissions |
| Mississippi |
Direct Pay Permit |
No specific dollar threshold found in state guidance; generally limited to specific industries |
Apply through the state’s TAP account (requires active use tax registration) |
Primarily issued to manufacturers, utilities, telecom companies, and bond-financed projects; not a general-purpose permit |
| Missouri |
Direct-Pay Agreement |
More than $750,000 in annual taxable purchases, excluding resale purchases |
Application under 12 CSR 10-104.040 |
Tax is remitted based on the purchaser’s business location |
| Nebraska |
Direct Payment Permit (DPP) |
$3,000,000+ in annual Nebraska taxable purchases or an approved ImagiNE Nebraska Act application |
Form 20DP; $10 nonrefundable application fee |
Must be reissued every three years |
| Nevada |
Direct Pay Permit |
No specific dollar threshold found in state guidance |
Application under NRS 360B.260 |
The seller must not maintain a place of business in Nevada |
| New Jersey |
Direct Payment Permit (Regular: ST-6A; Audit: ST-6X) |
No specific dollar threshold found in state guidance |
Apply through the New Jersey Division of Taxation |
Not valid for purchases of energy or utility service |
| New York |
Direct Payment Permit |
No specific dollar threshold found in state guidance; based on compliance history instead |
Form AU-298 |
Must be registered, have a New York place of business, and have filed and paid on time for the four preceding sales tax quarters; cannot be used once taxable use is already known at purchase |
| North Carolina |
Direct Pay Permit |
$5,000,000+ in annual tangible personal property purchases |
Form E-595A |
All purchases count toward the threshold, not just ambiguous-use purchases; separate industry-specific permits exist for direct mail and telecom |
| North Dakota |
Direct Payment Permit |
No specific dollar threshold found in state guidance |
Application through the North Dakota Office of State Tax Commissioner |
Holder must issue a direct payment certificate to each retailer in the prescribed form |
| Ohio |
Direct Payment Permit |
No specific dollar threshold found in state guidance |
Application for Ohio Direct Payment Permit (Form ST 900) |
Expires three to four years after issuance; revoked if an audit finds less than 80% of tax due was paid; three-year wait to reapply after revocation |
| Oklahoma |
Direct Payment Permit |
$800,000+ in annual taxable purchases for use in Oklahoma, excluding resale purchases |
Application through the OTC Business Tax Services Division (OAC 710:65) |
Valid for three years; monthly reporting required; must use a resale certificate for resale items |
| Pennsylvania |
Direct Pay Permit |
No specific dollar threshold found in state guidance; issued when taxability cannot be determined at acquisition |
Apply to the Pennsylvania Department of Revenue |
Governed by Sales and Use Tax Bulletin 2019-04, which sets requirements for proper use |
| Rhode Island |
Direct Pay Permit |
No specific dollar threshold found in state guidance; the tax administrator must be satisfied that use of the permit will not jeopardize tax collection |
Issued at the discretion of the tax administrator |
Valid for 24 months, subject to renewal |
| South Carolina |
Direct Pay Certificate |
No specific dollar threshold found in state guidance |
Application under S.C. Code § 12-36-2510 |
Holder is liable for all tax due on withdrawal, use, or consumption of property purchased with the certificate |
| South Dakota |
Direct Pay Permit |
At least $3 million in annual purchases of tangible personal property, electronically transferred products, and services subject to sales and use taxes |
Application requirements under Administrative Rule 64:01:01:34 |
Applicant must describe its accounting system and demonstrate that it reflects the proper amount of tax due |
| Tennessee |
Remotely Accessed Software Direct Pay Permit |
No dollar threshold; scope-limited program rather than a general large-purchaser permit |
Permit under Tenn. Code Ann. § 67-6-231(a)(2) |
Applies only to remotely accessed cloud software, not general tangible personal property purchases |
| Texas |
Direct Payment Permit |
$800,000+ in annual taxable purchases for own use |
Form AP-101; monthly Direct Payment Return (Form 01-119) |
Comptroller can revoke if annual purchases fall below the threshold; accounting systems must separate taxable/nontaxable and own-use/resale purchases |
| Utah |
Sales and Use Tax Direct Payment Permit |
Purchases of at least $1,500,000 for each of the previous three years; requires a clean filing and payment history |
Form TC-62DPA (Utah Code § 59-12-107.1) |
Not usable for motor vehicles, aircraft, watercraft, manufactured homes, or certain telecom and fuel purchases; approximately 15-day processing |
| Vermont |
Direct Pay Permit |
Eligibility is status-based, not volume-based; not a general large-purchaser program |
Form S-3 |
Limited to federal and Vermont government units and similar exempt-status entities, such as contractors working on their projects; records must be kept for at least three years |
| Virginia |
Direct Payment Permit |
No specific dollar threshold found in state guidance |
Apply to the Virginia Tax Commissioner under Va. Code § 58.1-624 |
Restricted to manufacturers, mine operators, public service corporations, and businesses storing property in Virginia for use both within and outside the state |
| Washington |
Direct Pay Program |
Expected cumulative tax liability of $240,000+ in the current calendar year or more than $10,000,000 in taxable purchases in one calendar year |
Online application through the Washington Department of Revenue |
Cannot be used for reseller-permit-eligible purchases, meals, lodging, titled vehicles, boats, aircraft, amusement, recreation, personal services, or telephone services; not transferable |
| West Virginia |
Direct Pay Permit |
No specific dollar threshold found in state guidance; issued at the tax commissioner’s discretion |
Application to the West Virginia Tax Division |
Generally limited to manufacturing- and communications-type purchasers; quarterly reporting required |
| Wisconsin |
Direct Pay Permit |
No specific dollar threshold found in state guidance |
Form S-101 |
Effective on the first day of the applicant’s tax year after issuance; holder must state whether use is for a single purchase or ongoing |
| Wyoming |
Direct-Pay Permit |
No specific dollar threshold found in state guidance; generally aimed at larger enterprises |
Application under Wyo. Stat. § 39-15-107.1 |
Holder may be audited once per calendar year by the Department of Audit |
States with no general state-level direct pay permit program
While most states have a direct pay permit program, a small minority do not. These include:
- Washington, D.C.: There is no evidence of a direct pay permit available in the District of Columbia.
- Hawaii: Hawaii does not charge a state sales tax. The state imposes a General Excise Tax (GET) on gross receipts. There is no equivalent buyer-side direct pay program under this system.
- New Mexico: New Mexico does not charge a traditional state sales tax. It charges a Gross Receipts Tax, which differs structurally. No direct pay permits are available within this system.
States with no sales tax, including Alaska, Delaware, Montana, New Hampshire, and Oregon, do not need a state-level direct-pay permit program.
However, Alaska's local governments levy local sales taxes, and state law sets no cap on the rate. If you regularly make mixed-use purchases in Alaska and feel a direct pay permit would be beneficial, check local rules.
How to apply for a direct pay permit
The process of applying for a direct pay permit can vary by state. Here are the general steps you will need to follow in most jurisdictions.
To apply for a direct pay permit in most states, you must:
- Submit a written application or request. Many states have a standard form, many of which are linked in the above table. Others require a written request to the tax authority.
- Show your need for the permit. You will generally need to demonstrate why your company requires the permit, the types of transactions it will cover, and how you'll track taxability.
- Include supporting documentation. You may need to provide documentation, such as financial statements, demonstrating that you meet the purchase volume requirements.
After you submit your application, you must wait for the tax authority to review the details and issue the permit. Processing timelines vary by state. Where they are published, they range widely: Utah lists about 15 days, Idaho four to six weeks, and Connecticut gives the commissioner up to 120 days to act.
Maintaining a direct pay permit
In order to maintain a direct pay permit, you must continue to meet any volume threshold set by the state and must comply with all filing and remittance requirements. Here are some specific steps.
Ongoing recordkeeping and filing
Companies that hold a direct pay permit must document every purchase made under the permit and classify it as taxable, nontaxable, or partially taxable.
States impose recordkeeping requirements on both vendors and buyers with a direct pay permit. If a company sells to a direct pay permit holder and doesn't charge tax, the company must keep a copy of the permit on file to be audit-ready and avoid liability for uncollected tax.
Direct pay permit holders also must follow state requirements for filing sales tax returns and remitting payments.
In many cases, you must file monthly and remit the full amount due on time. For example, West Virginia specifies:
"On or before the twentieth day of each month, every permit holder shall make and file with the Tax Commissioner a consumers sales and use tax direct pay permit return for the preceding month in the form prescribed by the Tax Commissioner showing the total value of the tangible personal property so used, the amount of taxable services purchased, the amount of tax due from the permit holder, which amount shall be paid to the Tax Commissioner with the return, and any other information the Tax Commissioner considers necessary"
However, the state allows less frequent filing if the amount due is below certain thresholds.
Renewal, expiration, and revocation
In some states, direct pay permits are valid until revoked. In others, they are valid for a limited period of time before requiring renewal. For example:
- In Colorado, the permit is in effect until Dec. 31 of the third year following the year in which it is issued.
- In Massachusetts, the permit is valid for a term of up to five years and expires on December 31st of the final calendar year of the current term.
Check with the relevant state to ensure you comply with the requirements for renewal to maintain an active permit.
Penalties for misuse
Direct pay permits are limited to specific situations where you are unable to determine if the transaction is taxable at the time of purchase.
If you use a direct pay permit for a transaction where taxability is clear, this is considered misuse. Penalties and interest may be owed. Your permit may also be revoked if you improperly use a direct pay permit for a transaction that you know is taxable.
New York's guidance provides an example of a company that buys a display case for a showroom. Since it's clear the purchase is taxable, the seller cannot delay paying sales tax by providing its direct pay permit to the vendor, even if it is a direct pay permit holder.
Most states, including New York, also prohibit permits from being used to generally defer tax, to substitute for a resale or exemption certificate, or to be transferred to others.
And in Illinois, permit holders must complete an annual review of transactions, and a penalty of up to $6,000 applies if fewer than 95% of reviewed transactions were correctly sourced.
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Benefits and risks of direct pay permits
Before applying for a direct pay permit, it's important to weigh both the pros and cons of complying with sales tax laws using this approach.
Benefits
The biggest benefits of applying for and using a direct pay permit include:
- Reducing overpayment of sales tax, which ties up your cash and necessitates filing a refund claim
- Shifting control over the determination of whether a sale is taxable to the buyer's accounting team
- Empowering you to build a strong defense against audits by maintaining extensive internal documentation systems
Risks
The biggest downsides include:
- A higher administrative burden, as every purchase made requires a determination of whether to use the direct pay permit, and each purchase made with the permit requires review and classification of purchased items as taxable or nontaxable
- A higher audit exposure if your self-assessment is not accurate, as the business is responsible for covering the uncollected tax plus penalties
- The potential for a permit to lapse, leaving a company without valid coverage and not realizing it
How direct pay permits interact with nexus
A direct pay permit is separate from sales tax nexus:
- Sales tax nexus determines when you have sufficient connections with the state that you must register to collect sales tax and remit sales tax payments.
- Direct pay permits transfer the tax-paying obligation to a buyer within the state that issued the permit. It does not affect whether your company has economic nexus.
Whether you have a direct pay permit in any state or not, you must track physical connections with the state that may trigger physical nexus and whether you meet the state's threshold for establishing economic nexus. Those thresholds vary by state, but are often around $100,000 or 200 transactions.
Numeral can take this monitoring obligation off your plate. Numeral offers free nexus monitoring, alerts you when it is time to register, and can auto-register you in states where you establish nexus. Numeral will also file and remit taxes on your behalf.
Numeral is a full end-to-end compliance solution. You do not have to think about sales tax with Numeral. We handle it all, including correspondence from state tax authorities through a virtual mailbox.
There are no long-term commitments with Numeral, and you simply pay $75 per filing and $150 per registration. All our services are backed by the Numeral Guarantee, and a U.S.-based tax expert reviews returns. If your sales tax isn’t filed on time, we cover the penalties and interest charges.
Get started now or book a demo to learn more about how we can help your company meet its compliance obligations.
Direct pay permit FAQs
If you still need to know more, here are the answers to some frequently asked questions about direct pay permits.
What is a direct pay permit in Texas?
A direct pay permit in Texas is available to eligible businesses that make at least $800,000 in annual taxable purchases for their own use.
The company can submit the permit to vendors to make tax-free purchases if it doesn't yet know if the transaction should be taxable based on intended use. The permit shifts the sales tax compliance obligation to the permitted buyer.
What is a direct pay permit in Florida?
Florida businesses may apply for a Direct Pay Permit using Form DR-16A. If granted, the business can purchase otherwise taxable goods or services without paying sales tax if it's not yet clear whether the transaction is taxable.
The permitted buyer will self-assess whether sales tax is owed based on its use of the purchased items and will remit the tax directly.
What is a direct pay permit in Washington state?
Washington's direct pay program is available to businesses that meet either a cumulative tax liability threshold or a taxable purchase volume threshold. It excludes specific purchase categories, such as parking, event tickets, and fitness memberships.
Buyers with a direct pay permit can purchase taxable items tax-free and then self-assess the tax once it becomes clear, based on the product's use, how much tax is owed.
What is a direct pay authorization?
"Direct pay authorization" and "direct payment permit" are different names that states use to describe a direct pay permit.
A company with direct pay authorization, or a direct pay permit, can purchase taxable items without paying the tax upfront if the intended use is not clear enough to determine whether the purchase should be taxable or exempt.
The buyer with the direct pay authorization assumes responsibility for sales tax compliance. After the purchase, the buyer must self-assess whether the sale should have been fully or partially taxable and, if so, file and remit the taxes due.
Is a direct pay permit the same as a resale certificate?
A direct pay permit is not the same as a resale certificate.
- A resale certificate is used to make a tax-free purchase of inventory that will be resold to a customer. The reseller collects the tax from the end user and files and remits payment to the state.
- A direct pay permit allows a buyer to purchase taxable items without paying tax upfront when the taxable use isn't known until after the sale. The direct pay buyer will assess whether the sale should have been wholly or partly taxable and will then remit payment.
How long does a direct pay permit last?
The expiration date for a direct pay permit varies by state.
Some states issue permits that have a fixed term, and the permit must be renewed, often after one to five years.
In other states, direct pay permits are active indefinitely unless the holder's business changes significantly or the state revokes it for misuse.
Can a small business get a direct pay permit?
Small businesses typically cannot get a direct pay permit.
Most states restrict these permits to buyers who purchase hundreds of thousands or millions of dollars of potentially taxable items annually, and most small businesses would not want a direct pay permit anyway due to the administrative burden these permits impose.
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