Friday, June 18, 2010

Golden Rule: The Resale Exemption

You can have anything you want, as long as you want cheap, plastic crap.This one is so obvious, it's taken me until now to make it a golden rule.

The idea of sales tax is that it's a tax on consumption. In other words, it's a tax on the transaction that involves the final consumer (end user). Most transaction oriented taxes are set up that way.

It's a different story when you start talking about who the tax is imposed on. Some states have a "gross receipts" tax, for example. The tax is legally imposed on the seller, but they are generally allowed to pass it along to the end user. But that "gross receipts" tax is still only imposed on the gross receipts of sales to the end user.

Who is the end user?

It's really hard to positively define them. So we use a negative definition - who isn't the end user? As discussed in the golden rule of taxable sales, "the final consumer is generally going to be the person who bought for any other reason than to resell..."

If you bought something to consume, you're the end user.
If you bought it to save or collect, you're the end user.
If you bought something to give to someone else, you're still the end user.

But if you bought it to resell to someone else, then you're not the end user. You're buying it for resale. The sale to you is exempt in virtually all states. Now before you start telling the good people at Wal-Mart that you're buying for "resale," a word of caution. You still have to go through all the state's registration paperwork, provide the seller with a resale certificate, and you'll have to file sales tax returns. Other than that, simple.

Why do consumption taxes only involve consumer transactions?

Because if the tax was imposed every time there was a sale, then the taxes would pyramid. For example:

The iron mine charges sales tax to the steel mill
The steel mill charges sales tax to the fabricator
The fabricator charges sales tax to parts wholesaler
The parts wholesaler charges sales tax to the component manufacturer
The component manufacturer charges sales tax to the car manufacturer
The car manufacturer charges sales tax to the car dealer
The car dealer charges you sales tax

You wind up paying a whole lot more for that car because everybody added that 8% sales tax into their costs and prices. That's pyramiding. So consumption taxes are only imposed on that last transaction.

The resale exemption justifies other exemptions, to some extent:

Direct supplies used by taxable service providers (in some states)

What about use tax?

Remember, that use tax is essentially a loophole plugger and wasn't meant to be a stand alone tax. Even though it technically isn't a tax on the transaction, it still is considered a consumption tax. It is, after all, a tax on use.

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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