I had a question from a class participant a few days ago, and it was such a good question, I thought I'd use it here. But I promised her I'd sanitize the heck out of it. So think of this as a question "inspired" by the real question.
"My company is an HVAC contractor [in most states, contractor sales aren't taxable - they pay tax on the building materials they use]. We prepare widgets in our shop that will be attached to the HVAC equipment. Since it's part of the construction job, we just cost the materials used for the widgets to the job and pay sales tax on the few hunks of steel that we use.
However, we have a lot of customers who buy the widgets without our doing any actual HVAC work (our widgets are very popular and user installable). When this happens, we just send the widget to the customer, and bill them. We don't charge sales tax. Should we?"
You should be charging tax on the widgets that you sell at retail to your customers. If the widgets become part of the building where you're doing the HVAC work, then you would pay tax on the widget components when purchased.
But when you sell the widgets outside of a construction contract, you are making retail sales of tangible personal property, and those are taxable sales. You should be charging tax.
The problem is that, if you've already paid tax on the components of the widget when you bought them, and then you collect tax on your retail sales of them, then the state is getting too much money. In most states, there are two solutions (and you need to check your state rules to make sure of your options):
Purchases resold - Many states make provision for purchases you make that were taxed, and are subsequently sold at retail where tax is collected. The states usually let you deduct your "purchases resold" from your use tax liability.
Buy for resale - If your retail sales of widgets are substantial, consider giving your vendor a resale certificate for all of the widget components and pay no tax on any of those purchases. Then collect tax on your retail sales and accrue use tax on the materials that become part of your construction contracts.
Either way, there is extra bookkeeping involved. But if the retail sales of the widgets are substantial, you should come up with a solution before the next auditor finds it.
This is another example of a situation where a business was making taxable retail sales without even realizing it. Does anyone else have this problem? You betcha!
And finally, if you are actually manufacturing the widget, you should look into whether or not there are any manufacturing exemptions available to you.
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. Here's more information
Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com
Don't forget our upcoming seminars and webinars.
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.