Monday, October 05, 2009

So what makes a retailer?

As promised, let's talk about what the states usually use as criteria for determining that someone is a retailer. As we saw, this is an important thing to determine because, if the seller is a retailer, then they must charge tax - the sale is taxable. Which means that if the seller doesn't charge tax, then the buyer must pay use tax (as we saw in this loophole).

Some states make it pretty easy. Their laws say that anyone in the business of doing anything is a retailer of anything they sell. So businesses in these states can't make occasional sales at all.

Other states use some sort of numeric test. For example, you might become a retailer when you have had three sales events in a year; or if you make sales of more than $5,000 a year.

But other states will use a mix of the following tests. Some of them are "mushy" and subject to interpretation, others are not so mushy:

1. Does the seller generate a great deal of revenue? This is relevant concern if you're trying to decide if a sale outside of the seller's normal line of business qualifies as a retail sale. If a retailer of structural steel components generates $500,000,000 in revenue every year, and they also sells $100,000 worth of computers, this is a pretty small percentage of their total revenue. But as an absolute number? $100,000 is a respectable amount of computers and would very probably qualify them as a retailer of computers just on that number alone. Let's say it was $5,000 worth of office furniture. Now the number becomes almost irrelevant. But read on.

2. Does the seller keep books and is she able trying to make a profit on the sales?

3. Does the seller hold herself out as a retailer, with advertising and signage? Does that steel company have a sign out in front saying "surplus computers for sale?" Not good.

4. Does the seller have staff assigned to selling the items? If our structural steel manufacturer was just getting rid of surplus computers by selling them only to employees, that $100,000 number might not be a problem. But if the company has staff assigned to make the sales, deliver and install the computers, then they're probably a retailer.

5. Is the item sold related to the seller's business? Let's say that the steel company has written software to help bridge-builders calculate how much steel they'll need. And they sell this software along with the computers. That's pretty seriously related to the business. Now the sales are unquestionably made by a retailer, and therefore taxable.

6. Do they compete with other sellers of the same products? In other words, do the other computer vendors in town look at the steel company as a competitor? If the steel company merely sold the computers to their employees as surplus, the computer dealers in town might not even notice what's going on. So this might not be a problem. But if they put that sign out by the road and sold to anyone who had the cash...problem.

But here is the final, and absolute test:

7. Does the seller buy items specifically for resale? If the steel company is merely selling surplus computers to their employees, that they had purchased for the company's use, this test isn't met. But one of the others listed above might be, so the company's not off the hook yet. On the other hand, if the seller is buying those computers with the specific intention of selling them to others, than no other tests are necessary. The seller is a retailer of computers and they're making taxable sales.

Remember, if a seller meets the test of being a retailer, then they are making a retail sale. They have to charge tax to the buyer, and, if they don't, the buyer is on the hook for the use taxes.

But if the seller isn't a retailer, then there's no tax. Period (subject to the wrinkles mentioned here).

As you can see, it's in the state's best interests to make you a retailer. So they'll interpret those above tests in ways you won't like.

Sales Tax Guy

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