Wednesday, June 02, 2010

Be Careful with your Assumptions

I was talking with a friend the other day. As I like to do, I figured out a way to introduce sales tax into the conversation. I knew that his customers were usually wholesalers and dealers. Here's the way the conversation went:

Me: So, Bob, do you guys charge sales tax?

Bob: Nah. Everyone who buys our stuff is buying for resale. We never sell to the end user.

Me: Not even off your website?

Bob: Nope. The quantities are just too small. We're set up to ship skid-loads of material. We just refer consumers to a list of dealers on the website

Me: What about contractors. You do sell directly to big contractors, don't you?

Bob: Yeah. But they're buying for resale too.

Me: Bob, I'll bet you didn't know this, but contractors are, in most states including the one we're in, considered the end users of the building materials they buy. Therefore you should be charging them tax. As far as the law is concerned, they are NOT wholesalers or retailers. They're the consumers.

Bob: [long pause]

Me: And I bet you're not getting resale certificates from your wholesale customers either. When you get audited, you'll need those certificates, even if it's your business model to only sell wholesale.

Bob: Can I use your phone. I left mine in the car.

Folks, you must be careful with your assumptions. Make absolutely sure of the taxability of every sale you make. The safest way is to assume everything is taxable until you can confirm that it isn't.

Here is the golden rule of taxability, which states the defaults for sales of services and sales of TPP. And here are the exceptions. And here are the situations where you'll need certificates.

Note that, if Bob had asked his contractors for resale certificates like he did for the rest of his customers (ahem), he would have discovered his mistake. Most contractors would be nervous about providing a resale certificate. Bob would then have presumably realized he should be charging them tax.

The Sales Tax Guy

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

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