Can I just pass on the tax?

A reader today posed this scenario. 

Mark is the manufacturer and sells to the retailer

Rhonda is the retailer who sells to the customer

Calvin is the customer

Apparently, Mark is charging Rhonda sales tax. 

Rhonda therefore incurs the cost of the sales tax.

Rhonda would like to pass on this cost to her customer, Calvin.

Can she?

There is an obvious question here

Why can't Rhonda buy from Mark for resale? This would seem to be the obvious and legal solution.  Particularly since Rhonda is required to charge Calvin tax if the sale is taxable and she has nexus in the state.

Two exceptions spring to mind

It's possible that this is a drop shipment and Mark has to charge Rhonda tax but Rhonda doesn't have a way to charge Calvin tax since she has no nexus in the delivery state. 

It's also possible that Rhonda is a contractor.  In most states, she pays tax to her vendors for her building materials but doesn't charge tax when she bills Calvin for the job.

These are the obvious and common exceptions - there are more.

Other than the above exceptions, Rhonda should be buying for resale and charging tax, if the sale is taxable.

However, if she is incurring sales tax for some reason (like the two listed above) and she can't pass it on, or is not allowed to pass it on, then it's a cost of doing business, and she has the ability to fold the tax into the price of her goods.  The only obvious restrictions I can see are:

Rhonda doesn't price herself out of the market and

the customer agrees to the price

Note that these are not sales tax law restrictions...this is just business.  Rhonda can set her price at any point she wishes, as long as the customer agrees.

However...

Rhonda generally can't charge Calvin something called "tax" in a state where she isn't registered.  Rhonda might think this is a way to recover the money from the customer without having to negotiate a new price.  Unfortunately the law generally requires that you must be registered in a state before you charge that state's taxes.  In addition, if she were to be audited, the state would ask her why she has not remitted that "tax" money to the state.  If Rhonda needs to show a charge on the invoice, call it a "we're going to hold you upside down and shake money out of your pockets" surcharge.  But don't put the word "tax" on Rhonda's invoice to Calvin.

And if Rhonda is making a taxable sale to Calvin, then she is required to charge Calvin tax, if she has nexus in the state.  And she should obviously be buying for resale.

Bottom line

If Rhonda is making a sale to Calvin that is taxable and she has nexus in the state, she should be charging Calvin tax.

If the vendor is charging her tax, she should figure out why she can't buy it for resale.

If it's some other situation where she's incurring tax as a cost, she can't pass it on as "tax."  But she can fold that cost, like any other cost, into her price. 

Geez, this stuff is complicated!  If you're reading this and desperately waving your hand because Jim missed something, I know.  But the more holes I fill in, the less understandable this is.  Suffice to say, it's messy.

And don't even get me started on absorption

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The Sales Tax Guy http://salestaxguy.blogspot.com
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Nutty Drop Ship States

Part of a continuing series on drop ships

[listed revised on 5/26 - not completely overhauled]

This is one of those things that has been rattling around on my articles-to-write list for a while. And I needed to update the list I use in my seminars and webinars

Herewith is, as of today, a listing of the "nutty drop ship" states. These are states that are either explicitly "nutty" or I failed to have the necessary language (in RIA's sales tax database) that makes them "not nutty." In other words, my default is that a state is "nutty" unless I can find enough information to make them "not nutty." This article explains "nutty."

Note that some of the states listed offer wiggle-room. Some will accept special paperwork or certificates. Several differentiate between interstate and intrastate shipments. FOB points may come into play. However, the states marked with an asterisk* appear to offer very little wiggle-room, if any.

You always need to do some research to determine the drop ship rules in the delivery state.  Also, remember what I've said about information in tabular format. Check everything out yourself before making any serious decisions. See the disclaimer.

NOTE: This list is for illustrative purposes.  It's out of date.  Do your own research.

Alabama
California*
Connecticut
DC
Florida*
Hawaii
Illinois
Louisiana
Maine
Maryland*
Massachusetts*
Mississippi*
Nebraska
Nevada*
North Dakota
Oklahoma
Pennsylvania (new rule in Feb 2010)
South Dakota
Tennessee
Virginia

Sales Tax Guy

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You can't just charge tax

I had an email from a reader the other day asking a follow-up question to the nutty drop ship rule article. [I just reread it and, other than the addition of a chart, it still works...dang I'm good. But I digress.]

Now you're going to have to go back and get the cast of characters straight in that article. The reader is Curly. She goes ahead and pays tax to the vendor (Larry). But she doesn't want her customer (Moe) to have to pay the tax later. So she asked if she can just show the tax on her invoice to Moe so he (and the auditor) can see that it has been paid.

Every state is different in this, so you must research this on your own. But here's the thing. You can't charge your customer sales or use tax unless you actually are registered in the state. This is the law in most states. There are a couple where this isn't the case, and many states have some sort of temporary permitting capability. But the point of this article, even though I'm roping in the drop ship issue, is unless you are registered in the state, in some way, for sales and use taxes, you cannot legally collect that state's tax.

So generally, Curly can't charge his customer tax. I would say that you have to be very careful about this. If you want to simply show the tax as a separate cost, built into the price of the goods, along with inbound freight, labor, expenses, materials costs, etc., that might be OK. The taxes you pay are a cost of doing business.

But if you have a "merchandise total" and then another number for tax, that's going to look fishy and might get you into trouble. It sure looks like you're charging them tax.

The other thing to remember is that the customer might question the charge. He'll be wondering why he has to pay tax. He thought, by buying from you, that he wouldn't have to worry about paying tax. Now you're charging him tax? The fact that the total at the bottom of the invoice is what you quoted probably isn't going to help. And it'll just confuse him more. Can your customer service people field these kinds of questions?

And if that weren't enough, the auditor probably isn't going to care about any "taxes" on the invoice unless you're registered to collect the tax in her state. So putting something called "tax" on the invoice isn't likely to help anyway.

Another option is to do what destination state (where Moe is) wants you to do - register. Then you'll be able to buy tax free because you'll have the proper resale certificate, and you'll be able to legitimately charge your customer tax giving him a proper receipt for taxes paid. But that opens up another can of worms.

I've given you a lot of generalities in this article. You must check to see what the rules are in the destination state.

Sales Tax Guy

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Why is my vendor charging me tax on drop shipments?

Here’s the problem.

- Moe (in California) orders goods from Curly, the retailer.
- Curly (in Wyoming) orders goods from Larry, the manufacturer or distributor.
- Larry (in Georgia, but with nexus in California) ships the goods to Moe.
- Larry bills Curly.
- Curly marks it up and bills Moe.
- Curly is registered ONLY in Wyoming, has a WY resale certificate and does NOT have nexus in California. Which means he doesn’t charge Moe any tax.

In, what I like to call, the “nutty” drop ship states (California is one of them), they require that Larry must charge CA tax to Curly, even though Curly is buying for resale. They will let Larry off the hook for the tax if Curly provides Larry with a California resale certificate (and CA registration number, of course). Curly doesn’t have this because he doesn’t have nexus in CA. And he doesn’t want to register in CA and therefore collect tax because he’ll loose any competitive advantage he has in CA, aside from the other problems with letting CA know he’s out there.

So Larry must collect the tax from Curly and Curly obviously has his margins squeezed. And he can’t pass on the tax to Moe because he’s not registered to collect tax in CA.

Moe also loses here because, since he has an invoice from Curly with no tax shown, the auditor will assess him for use tax on the purchase that Larry has already paid the tax on!

Many vendors (Larry) have been caught on this issue by NDSS (nutty drop ship states), so many of them just automatically follow these rules, regardless of whether they’re shipping to a NDSS or not. This causes problems for the Curlys of the world because they’re being forced to pay tax that isn’t truly due.

If you find yourself in this situation, I recommend that you research the NDSS situation in the ship-to state, and then challenge the vendor. Make them show you where they’re required to charge tax and show them what you’ve come up with. And of course, depending on the relationship you have with the vendor, don’t pay the tax.

There's more on this here

Sales Tax Guy
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.tdropships