Absorption

This is the first article in my current "absorption" series.

Most states have a law on the books that says something like this:

Thou shalt not tell thy customers ....

[sorry - just watched "The Ten Commandments" - I'm starting over now.]

The seller must separately show the sales or use tax on the invoice. The seller cannot bury the tax in the price of the goods, nor can they offer to "refund the tax." Not separately showing the tax on the invoice is generally called absorption. The seller is absorbing the tax into the price of the goods.

Why do states have this rule? It sounds like no big deal. If the seller wants to eat the tax, let 'em. See the link to the news article on absorption here to see why it's a good idea to make legislators stuff socks in their mouths.

These are the reasons I've learned, without doing any serious research on the subject. And if anyone can think of any more, please let me know.

1. If the buyer gets an invoice showing that no taxes were charged, what are they going to have to do when the auditor comes to visit? So the invoice, with the taxes shown separately, provides the taxpayer with a receipt showing that they've paid the tax. But if the seller absorbed the tax, there's no receipt and the buyer gets taxed a second time. Hooray for the auditor!

Note that this is why I told you in this article, to not simply accrue taxes when certain sellers don't charge you tax. If they absorbed the tax, then you'd simply be paying a second time.

2. States that have this rule intend for the sales and use tax to be imposed on the final consumer, not on the seller. Why? Because the state has other taxes they may want to impose on the seller's sales, like gross receipt taxes, franchise taxes, income taxes, etc. If they did not make it clear that the tax was on the final consumer, then those other taxes might be a problem because you then would really and truly have double taxation.

I'm not a tax theorist (although I play one on TV), but I'd guess that if the state passed a law that says that there's a 6% tax on your sales, and then next year passed another law saying that there was an occupation tax of 7% of your sales, you'd probably have a winning case of the same thing being taxed in the same way two different times. I'm guessing that something that bald-faced won't work. Otherwise the states would do it. They have to be a little sneakier than that.

But if the state insists that sales tax is imposed on the ultimate consumer, and that the seller is merely the collector of the tax, then the state can get away with imposing that 7% occupation tax.

So the state passes a law that says the seller must pass the tax on to the buyer. Therefore the buyer is clearly carrying the burden of the tax. Absorption laws make this clear.

3. Having laws stating that the tax must be separately stated give the seller an excuse for charging tax. Rather than getting into a dickering match with someone about the 6% sales tax they have to charge, the seller can merely say that they're required by law to charge tax.

4. Tied in with number 3, if the seller does build the tax into his price, what happens when there's a rate or rule change? Do they now have to go through and reprice everything? It's probably a minor point but requiring them to add the tax to the invoice seems to solve that problem and, in the long run, be more efficient.

5. This one sticks to me from my first sales tax audit, over 30 years ago. I was chatting with the sales tax auditor. He was a very nice guy, an old timer who was counting the days to his retirement. He really stuck it to us (we deserved it), but he was nice about it. During one meeting, I asked him about the reason for absorption laws. He said that they don't want citizens to get the idea that sales tax is an optional thing, that it's up to the seller to decide if they get taxed or not. Which ties in with item 3 as well. The state wants people to expect sales tax.

So this article covers the absorption law and most of the reasons for its existence. In future articles, I'll talk about the variations on this law and how the seller can really get in trouble on this.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Picture note - It's a sponge. And I'm talking about absorption. Get it? ;-)