Sales tax collecting?
February 26, 2011 5:47 AM   Subscribe

In business - Is it true that if you pay sales tax on your materials you do not have to charge to your customers?

I work for a construction materials company that has multiple out of state vendors and customers. In some cases, we will have one job in a state and wont see another for years. I'm not sure if it matters, but we drop ship the materials so we do not keep an inventory.

Someone just told me that if we pay sales tax on our materials when we purchase them, we do not have to charge our customers and file the taxes. Is this true? What if the vendor is in a different state than the customer? If it is true and we don't have to file, do we still have to register to do business in the customer's state?
posted by Snackpants to Work & Money (7 answers total) 3 users marked this as a favorite
I am an electrician in Florida. I am pretty serious about keeping our licensing and books in order.

I do not charge customers sales tax on materials installed. I am not an accountant or tax lawyer, but I did get professional advise on this issue.

My understanding is that sales tax applies to tangible personal property only, but not to real property (real estate). When materials are purchased at a supply shop, you pay sales tax because your are buying personal property. When those items are properly installed in a home, they become part of the real property (part of the real estate). As a contractor, you are providing a service labor and improvements to real property. You are not selling tangible personal property. Thus, you do not have to charge customers sales tax on material.

But, like I said, I am not a tax professional. There is the chance that I am totally wrong, or that the law is different in your state.
posted by Flood at 6:19 AM on February 26, 2011

2nding consulting an accountant - I just asked my CPA-wife, and the answer I got was:

"He should talk to someone about his specific situation, because sales tax issues can vary greatly state-to-state. In general for something like this, he would provide a sales-tax exemption to his supplier, and then he would charge sales tax to the final customer and file that. However, with all the different states involved, that could be very very different and he shouldn't rely on anything I'm saying"
posted by um_maverick at 6:54 AM on February 26, 2011

Not a tax attorney, but as I understand it -- if you purchase something at retail and pay sales tax on it, you need to keep track of that, because when you resell that item you can deduct the salestax *you* paid on *your* form. You still have to charge a customer sales tax whenever you make a sale and remit that to the state, but the sales tax YOU pay is deductible. This means at the net result is that the state still gets salestax on the markup you added to resell (the difference between the tax you paid and the tax you charge). Your method means that, if you buy something for ten cents and sell it for a dollar, the state only gets sales tax on that ten cents and not the dollar, which isn't how they want it.

As a convenience to avoid the paperwork, if you present your retailers identification number, you can make purchases sans salestax -- when wifey and I buy antiques for resale, we show the antique shop owner our sales tax card, and they don't charge us tax...but they record our number so that they can prove they had good reason not to charge us sales tax. The net result is the same as above, but you're not deducting any taxes on your forms. This also has the added advantage of not having to "float" the salestax while the items sit in inventory.

Regarding different states: in my state, generally, sales to out-of-state customers do not require collection of sales tax.

If talking to an attorney is out of the question, talk to your state's tax department -- they're usually quite helpful.
posted by AzraelBrown at 6:56 AM on February 26, 2011

I'm not sure if it matters, but we drop ship the materials so we do not keep an inventory.
Nthing checking with a CPA or tax attorney. Anecdotal: I used to work in the steel industry and as part of my job I also purchased non-steel items for resale to one of our automotive customers in Mexico (everything from forklifts to fireman's boots). Most of the stuff we drop shipped. Every time we used a new vendor, I had to fill out a tax exemption certificate. It was just a small piece of paper that listed the three or four reasons you were exempt, you checked off the appropriate box(es) and signed it. Vendor kept it on file, no problems of paying sales tax again. In our case, we were exempt because the items I purchased were for resale. Depending upon your own state's laws, you likely could also be exempt for this reason (or by virtue of using the item in industrial processing).
posted by Oriole Adams at 9:42 AM on February 26, 2011

Agree with AzraelBrown on both points. Sales tax is supposed to be charged on the amount of the consumer selling price (at least here in Texas). When my company is charged sales tax for something that we are gong to resell I do one of two things: Send a check for the non-tax subtotal and include our tax exemption certificate OR I keep track of the sales tax and include that amount on our Sales Tax Report to the state. Any vendor you deal with should be given a copy of your tax exemption certificate and shouldn't charge you sales tax anyway.

Also, I have had to call our state's sales tax office with a question before and the lady who helped me could not have been more knowledgeable or more helpful. I would definitely recommend calling them up if you have a question.
posted by magnetsphere at 9:48 AM on February 26, 2011

Not an accountant, but in a former life I was a subject matter expert on a very popular account software program. If you aren't sure, you should check with your accountant. If you don't have an accountant, you are getting an accountant, because every business in the United States should have an accountant. Your accountant wants to answer this question for you, because when you do it wrong, it results in many more hours of work for him/her when they are the busiest.

Someone just told me that if we pay sales tax on our materials when we purchase them, we do not have to charge our customers and file the taxes. Is this true?

No. No. No. No. No. Whoever fed you this likes tax trouble and pissing off their accountant. Unless you are a wholesale business (and properly licensed to be one) you are charging sales tax to your customers. You are reselling a product. The part that is going to clue you in is the following: Do you do any markup on materials? Many contractors and construction people do, because it's easy money. So would you only charge your clients sales tax on the markup amount but not the base price? Of course not. You'd charge them for all of the sales tax.

You will need to track all sales tax you pay out to vendors, and report it separately, and you will get that money back in doing taxes later.

The above is very general, because it really depends on where you are. Different states, counties, cities, townships, etc. all have different rules.
posted by Mister Fabulous at 4:18 PM on February 26, 2011

Mister Fabulous makes good sense. My very limited understanding of the subject says that there are only two paths these transactions can take:

1- You buy the goods, pay the tax, and then charge the customer exactly what you paid. In this case, you aren't selling it, you are being reimbursed for it.

2- You buy the goods and charge the customer more than you paid. You have to now fill out the tax forms, pay the sales tax, and possibly get credit against what you owe for the tax you paid. Or get a sales tax exemption and not pay tax to your vendor, and pay all of it to the state.

(Note: you do not necessarily have to CHARGE the sales tax, you only have to PAY it to the state based on your total sales.)
posted by gjc at 8:43 PM on February 26, 2011

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