You can't just charge tax

I had an email from a reader the other day asking a follow-up question to the nutty drop ship rule article. [I just reread it and, other than the addition of a chart, it still works...dang I'm good. But I digress.]

Now you're going to have to go back and get the cast of characters straight in that article. The reader is Curly. She goes ahead and pays tax to the vendor (Larry). But she doesn't want her customer (Moe) to have to pay the tax later. So she asked if she can just show the tax on her invoice to Moe so he (and the auditor) can see that it has been paid.

Every state is different in this, so you must research this on your own. But here's the thing. You can't charge your customer sales or use tax unless you actually are registered in the state. This is the law in most states. There are a couple where this isn't the case, and many states have some sort of temporary permitting capability. But the point of this article, even though I'm roping in the drop ship issue, is unless you are registered in the state, in some way, for sales and use taxes, you cannot legally collect that state's tax.

So generally, Curly can't charge his customer tax. I would say that you have to be very careful about this. If you want to simply show the tax as a separate cost, built into the price of the goods, along with inbound freight, labor, expenses, materials costs, etc., that might be OK. The taxes you pay are a cost of doing business.

But if you have a "merchandise total" and then another number for tax, that's going to look fishy and might get you into trouble. It sure looks like you're charging them tax.

The other thing to remember is that the customer might question the charge. He'll be wondering why he has to pay tax. He thought, by buying from you, that he wouldn't have to worry about paying tax. Now you're charging him tax? The fact that the total at the bottom of the invoice is what you quoted probably isn't going to help. And it'll just confuse him more. Can your customer service people field these kinds of questions?

And if that weren't enough, the auditor probably isn't going to care about any "taxes" on the invoice unless you're registered to collect the tax in her state. So putting something called "tax" on the invoice isn't likely to help anyway.

Another option is to do what destination state (where Moe is) wants you to do - register. Then you'll be able to buy tax free because you'll have the proper resale certificate, and you'll be able to legitimately charge your customer tax giving him a proper receipt for taxes paid. But that opens up another can of worms.

I've given you a lot of generalities in this article. You must check to see what the rules are in the destination state.

Sales Tax Guy

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