Why do I have to pay sales tax on the car I bought from a guy on Craigslist?

In my surfing adventures looking for material for my other blog, I often come across questions that people have asked on various online fora*.  And sometimes they're grist for my blogging responsibilities.

The question is at the top of this article. Here's my poor attempt at an answer:

When you buy a car from a dealer, they are going to charge you sales tax on the sale of the car. I think we all kind of understand that. Easy. Unpleasant, and maybe a surprise, but nevertheless - we get it.

When you buy a used car from a dealer, they are still going to charge you sales tax on the sale of the car. "Whoa," you say, "what are you talking about? It's used! Sales tax already has been paid on that car."

It doesn't make any difference. You see, a common misconception is that sales tax is on the item being sold. It's actually on the sale itself. That's why it's called a sales tax. That car might keep getting traded in, and every time a dealer sells it, it's subject to sales tax.

However, there is another way you can buy a used car - from Jim on Craigslist. That's how I sold my 1997 Pontiac Grand Prix**

I put an ad on Craigslist and someone called within a couple of hours and handed me cash later that day. And I, as the seller, didn't have to charge Joe sales tax. And before you ask "why?" I'll tell you. Because I was making an occasional sale (often called a casual sale). These are sales by sellers who are not in the business of selling the item being sold. Since I wasn't in the car sales business, I didn't have to charge tax on the sale of Eleanor (yeah, I called her Eleanor).

That's also why you don't have to charge tax when you have a garage sale - you're making an occasional sale.

But here's the thing. Cars are probably the most expensive thing that most of us will ever buy that's not real property (like a house). The state doesn't want to give up the sales tax just because Joe didn't buy the car from a dealer. But they also have trouble imposing the responsibility of charging the sales tax on me because I'm probably going to screw it up. Since I don't sell cars very often (like once every 20 years), I'm unlikely to know about a rule that says I have to collect the sales tax. So most states have an alternate plan. They collect the tax when Joe registers the vehicle and gets his new plates.  Joe, of course, is surprised and complains about it on an internet forum. ***

So I, the seller, am off the hook. But Joe is in for a surprise when he goes to the DMV.

Finally, it's a technical matter, but the type of tax changes when you pay the state when you register the car. Sales tax is a tax on the sale of the car. But when the state can't impose tax on the sale, they have this other tax that plugs that loophole. It's called "use tax." This is a tax on Joe's use of the car. Some states will properly call it use tax. But others will call it a sales tax just so that Joe doesn't freak out thinking that the state is just making up taxes now.

* Yeah, I know the more usual word is "forums," but I just like the way "online fora" sounds. Trust me, I'm not trying to be a word snob. I'm not an elitist - I'm right down there with the rest of you people.

** I loved that car. It's the only car I've ever had where girls actually thought it was cool. Not me of course, but the car. Loved that car.

*** See, I can use regular people words too!

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The Sales Tax Guy
http://salestaxguy.blogspot.com

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

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Parables and Illustrations: Do you sell equipment?

If you sell old equipment, you may be making taxable sales.  Have you taken a look at this problem?

One particular construction company that I'm familiar with (heavy/highway) is constantly buying new equipment.  Constantly.  The owner really likes new equipment (he must have been a big fan of Tonka toys as a child). 

In the old days, as he bought new equipment, the owner would need to sell the odd piece of used equipment.  This happened a couple of times a year and the transactions were concluded over a beer at the local tavern.  These were "occasional sales" and wouldn't be taxable. 

But, as the years went by, and the company grew, they found themselves getting rid of more and more used equipment.  They added "selling equipment" to the job description of one of the purchasing guys and started paying him a commission.  They parked the equipment in front of the building, put a sign up, and installed lights so that the equipment could be seen at night.  The deals were now closed at the office, not over a beer.  The company had become a used equipment dealer.  But they did not realize that.  Until the audit.

The state came in and noticed the amount of cash being thrown off by the equipment sales.  They also noticed the lights, signs, etc.  The auditor said, "you know, you should be charging tax on all of those sales."  The company talked to a lawyer, who referred them to a sales and use tax lawyer, who told them they were screwed.  The assessment was over $300,000 with the interest and penalties.  The lawyer helped get that reduced, but it still hurt.

Another situation was similar, but not as painful. 

A hospital found themselves selling lots of used medical equipment.  They could afford to be spendthrift because of the patient mix in their service area (lots of private insurance).  They sold the used equipment to other, poorer hospitals, clinics, and physicians offices.

Yes, the hospital was a non-profit organization.  But sales by non-profits are usually taxable, other than fund-raising events.  So this hospital should have been charging tax.

"But wait! Weren't they selling the equipment to other exempt hospitals?  So the sales would still be exempt, right?"

Yep.  But remember that not all hospitals are government or non-profit operations.  There are for-profit hospitals too.  And they sold equipment to physicians and clinics who are generally taxable.

Luckily, unlike the construction company, this organization realized what they were doing and began collecting taxes before they got caught.

Not such a horror story, but illustrative anyway.

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There are three major points to be made here:

1.  You may be selling so much equipment that you become an equipment dealer.  If you're doing more than selling the odd item over a beer, you should take a hard look at the situation.

2.  Your core business may not be your only source of taxable sales.  Other sales may be taxable without you realizing it.  Until the audit.

2.  Your company changes.  If you make a judgment about the taxability of something today, will the same set of circumstances and laws exist in five or ten years?  You need to frequently re-analyze what you are doing.  Don't just rely on the decision that was made in the good old days.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

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.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. 

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Sales Tax on Big Chickens?

You're on vacation and you stop in at an interesting looking art gallery.  A giant chicken catches your eye and you buy it for $10,000,000.  You're a collector of over-sized fowl and this one will be the crowning glory of your private art gallery.  It's a good thing you've got that really high limit on your MasterCard.

The dealer prepares the invoice.

Chicken.............$10,000,000

Sales tax (8%)..........800,000

Total...............$10,800,000

Oh, come on!  Whoever heard of paying $800,000 in sales tax?  This can't be taxable!

Actually, it is.  And you've just made the revenue department in this state very happy.

Let's use the golden rule of taxable sales:

1.  There's a sale
2.  It's tangible personal property.  It's obviously tangible.  You saw it and you sat on it. And it wasn't permanently affixed to the floor. So it's tangible personal property.
3.  The sale was made by an art gallery - someone in the business of selling art - a retailer.
4.  You're buying this for your home or office, not to resell, so you're the end user.

Congratulations, you owe sales tax.

Now, you didn't get rich by just throwing around $800,000 here and $800,000 there.   There's got to be a way out, right?

Hmmm.  Not really.  There are some common evasions, but no real and legal way out.

1.  You can ask the gallery to ship it out of state to your home in Gotham City, where all the best Big Chicken collectors hang out.  There's no sales tax when you ship out of the state, right?  The dealer, who just got audited last month, points out that he can't do that.  Since you're in the store, and effectively have control of the Big Chicken as soon as the sale is signed, you have taken delivery in the store.  That means that the state you're in has jurisdiction and will impose tax.  If the seller doesn't do this properly, he'll get nailed by the auditor (again) when she comes back in six months.

2.  Even if you convince the dealer (maybe he's new and hasn't been audited yet) to not charge tax and to ship it to your home in Gotham City, you will now owe use tax on that objet d′art in the great state of Gotham.  And since you're so stinkin' rich, you know they're going to audit you one of these days.  Actually, unfortunately this doesn't happen all that often.  You do owe the use tax.  Whether you pay it or not is more of a reflection of your character.  Bruce Wayne would pay the use tax.  Just sayin'.

A different scenario

Let's say you're driving down a dirt road while on vacation, and see a yard sale with that chicken standing there in all of its glory. In a cloud of dust you slam on the brakes and kind of casually ask the rube what he  wants for that "old chicken."

"Ah'll take $10,000,000 please.  Ah inherited that from mah Daddy and he durn told me whut it were worth."

Dang.  You write him a check since he can't take a credit card, and have him arrange for shipment to Gotham City.

Now, there's been a change in the situation.  It's no longer a sale by a retailer, it's an occasional sale.  Since the farmer isn't a retailer (he was having his annual yard sale) he doesn't collect sales tax.  And since you purchased the item in an occasional sale, you owe no use tax, either in the state where you bought it, or in Gotham.  Remember, the sale wasn't by a retailer, therefore it wasn't a taxable retail sale.

So in this scenario, you've saved the $800,000 in sales and use taxes.  Legally!  But only because you bought it in an occasional sale.  Buy it from a dealer, and you owe the tax.

As is usually the case, not every state does it in the ways I've described.  There are variations in several states on the way they handle in-store purchases that are shipped out of state, as well as use tax on occasional sales.  Do your research!

Which leaves us with the moral of this story:

If you're going to buy big chickens, stick to the dirt roads.

Yep, I know.  Sometimes these articles just write themselves.

This is our last article for 2010.  It has been a good year for us and I hope it has been for you as well.  We currently have January and February on our webinar schedule and will be adding March, hopefully by the first of next week.  Happy New Year!

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The Sales Tax Guy
http://salestaxguy.blogspot.com

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.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. 

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It's spring - when thoughts turn to garage sales (and sales tax)

Do I have to worry about charging sales tax on my garage sale?

If you live in most states, and you only have one sale a year, no.

The reason is that you're making an occasional sale (aka a casual sale). These types of sales are not taxable for the simple reason that they're not taxable retail sales. You're not a retailer. As long as you're not a retailer in the eyes of the state where you're conducting the sale, then you don't have to worry about charging (and remitting) sales tax.

Why aren't you a retailer?

1. You're only doing this once a year. More than that and some states start paying attention.

2. Your signage consists of a crummy piece of poster board that your kid made and hung with duct tape on the stop sign at the corner. And you've got a couple of balloons in the yard. The balloons don't even have helium - cheapskate. No self-respecting retailer would do that.

3. Your competitors don't know about you, other than that jerk down the street who also decided to have HIS garage sale this weekend. Do the real "antique" dealers in the area care about you? No, of course not.

4. There's no real business associated with this event. You're doing it in your front yard. And we're not talking about your son's lawn mowing business.

4. You didn't buy all that junk to resell. You bought it to use. I'm not talking about whether or not you did use the stuff. You intended to use it.

So you're off the hook. In most states, you don't have to charge sales tax.

What about anything you buy at a garage sale? Do you owe use tax?

Again, generally no. There is no taxable retail sale because there is no retailer. If there is no taxable retail sale, then there's no event to charge sales tax on, and there's no event that use tax covers either. So no use tax is owed by the buyer.

Note, if you're in Colorado, forget about everything I just said. In fact, just ignore this whole article. Sorry.

And if someone is selling a car, truck, boat or snowmobile at their garage sale, the rules are different.

For the rest of you, yay! Have fun. And call me if you see anything that looks like it'll do well on Antiques Roadshow and is waaayyyy under-priced.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. The rules do vary from state to state.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Motor Vehicles

There are a couple of special rules regarding motor vehicles and sales and use taxes that bear mentioning.

1. In some states, motor vehicles are exempt from sales and use tax! This isn't a windfall for you; they just have a separate motor vehicle tax that looks and smells like a sales tax. Sometimes the rates are different. And the rules are certainly different.

2. Let's say you are a resident of state A and you're buying the car in state B. Many states, including B, will not charge you their sales tax, if you provide reasonable assurance that you're going to take the car right back to state A, where you live. State B knows that you're going to register it there, so it's not like you're evading sales taxes. And this gives the car dealers in state B more potential customers in state A.

You often see this in states with cities right along the border with other states. And usually state B's sales tax rate is higher than state A's. If this exemption didn't exist, then nobody in his right mind would leave state A and go over to state B to buy a car. So by giving this exemption, the car dealers in State B are now on a level playing field with the car dealers in state A.

3. Most states will recognize that it would be mean to tax you again on a car that you bought in another state. Let's say that you bought a car in state T while you were living there. Then you move to state W. When you go to get the plates for your car in state W, they're going to want to assess you use tax on the car that you have brought into their fair state. But if you've saved the paperwork, you'll be able to show that you already paid sales tax on the vehicle in state T. State W will usually give you a credit for the taxes you've already paid.

Example: You bought the car for $20,000 in state T and the rate was 7%. So you paid $1,400 sales tax. The rate in state W is 9%. So you'll pay 2% (the difference in the rates) of $20,000 - $400. That's some money, but it's better than paying the full 9%. And you really haven't been double taxed. You just made the mistake of moving to a state where the taxes are higher.

4. Finally, we come to occasional sales. If Mike sells a car out of his driveway to Jane, Mike is making an occasional sale. Mike doesn't have to charge Jane sales tax because he's not a retailer of cars. However, Jane is going to have to register this car. When she does, the clerk at the counter will ask to see the bill of sale. And he'll notice that no taxes were charged. Jane will have to pay the use tax on her car, since she didn't pay sales tax when she bought it.

The state normally has no way of capturing sales tax revenue in occasional sales. So they just make occasional sales exempt. But when it's an occasional sale of an item that has to be registered, then they can now get their money when Jane registers it. Yay!

A word about terminology. While the tax that Jane will have to pay is really a use tax, the states almost invariably call this tax sales tax. I'm pretty sure it's just so they don't have to have an argument with Jane about this weird tax she's never heard of. But Jane knows all about sales tax so she's less like to ruin the poor clerk's day.

Also, there is a big exception in most states for intra-family transfers of vehicles. In an occasional sale between the parents and children, the transaction is almost always exempt. Some states also include grandparents, uncles, siblings, step parents, etc. But at a minimum, the exemption will include parent to child.

As always, check your state laws to see what the specific rules are that apply to you.

Sales Tax Guy

See disclaimer.

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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

See disclaimer

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Occasional Sales

As I've talked about in this golden rule, "generally [in order to be a taxable sale], the sale must be made by someone who is in the business of selling the product or service. If they're not in the business, then they're making an occasional sale." Occasional sales will sometimes be called casual sales - same thing.

So if Joe sells this piano out of his living room to Marlene, Joe doesn't have to charge Marlene sales tax. Joe is not in the business of selling pianos, and therefore the state doesn't require him to collect sales tax.

However, what about Marlene? You might think that this loophole would be the state's justification for going after Marlene for the use tax, since the Joe was not required to collect the sales tax. But remember this golden rule - in order for there to be any tax, the item must have been purchased in a retail transaction. This piano wasn't, because it wasn't sold by a retailer. Therefore, Marlene doesn't have to pay the use tax to the state

So, even if the piano is a $5,000,000 antique that Mozart owned, as long as it's sold in an occasional sale, the seller doesn't have to charge sales tax and the buyer doesn't have to pay use tax.

There are some wrinkles though.

1. Remember that it's only an occasional sale if the seller isn't normally in the business of selling the item (in this case, a piano). But the states' rules are usually pretty broad in defining what is "in the business." So if you sold a couple of pianos in the same year, and the state was missing out on a LOT of sales tax revenue, the auditor could get pretty aggressive about whether you're "in the business" or not. Soft, mushy rules make for interesting audits. I'll cover this more in a future article.

2. In a some states, the effect of the laws is that a business can't ever make an occasional sale. Therefore, if that piano was sold by a sludge manufacturer who simply had it in their lunch room for the employees' entertainment, they would still have to charge sales tax.

3. There are a couple of states where, in an occasional sale, if the buyer is a business, then the business would have to pay use taxes, even though Marlene (not a business) would not have to pay the use taxes. Yes, businesses aren't treated the same as individuals. What do you expect? Businesses don't vote so they're fair game for the politicians who really only care about votes. Oops, I put on my editorial hat for a second.

4. Finally motor vehicles and other purchases that are required to be registered are handled differently (this will be the topic of a future article).

As usual, you need to check the rules in the delivery state.

The moral: if all the conditions are met and the t's are crossed and the i's are dotted, an occasional sale causes zero tax liability - no sales tax and no use tax. Remember this when you hit the garage sales this weekend. You don't have to worry about paying use tax on your purchases. Because I'm sure you were.

Sales Tax Guy

See disclaimer

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Picture note: the picture above is hosted on Flickr. If you'd like to see more, click on the picture.

Sales and Use Tax News Links

In the category of not-so-smart politicians, Arizona is the state you want to live in if you want to buy a used car. From AZCentral.com, in just about every other state, if a car is bought in an "occasional sale" situation (like buying a car from someone in their driveway), there's no sales tax because the state can't make someone, who's doesn't do it as a business, collect sales tax (it's an occasional sale). But states CAN impose a "use tax" on the car when the buyer goes to get the car registered. Just about every other state does this at the counter at the motor vehicle office. But Arizona evidently doesn't.
They are giving away tax revenue that the other states manage to capture. And dealers obviously have a bone to pick because they're geting shafted by having to charge tax whereas an individual seller doesn't.

And the politicians don't want to make the seller collect the tax. Right, it's an undue burden. But why not do what every other state does, and collect when the registration occurs? Oh, yeah. It's an undue burden on the people behind the counter at the state office. Sorry, I forgot.

Duh.

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There is a lot more news about the Pennsylvania proposed tax on arts admissions.

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Ohio proposal for a sales tax holiday in August and December!

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California announces that certain business buyers will have to register for use taxes, even if they don't have to register for sales tax. From Acccounting Web.

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Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars And we do coaching!

And please don't forget to visit our advertisers!

Golden Rule: Taxable Sales

A taxable sale, one that triggers either sales tax or use tax, occurs when all of the following events happen:

1. There is a sale
A transaction has occurred where one party bought something in exchange for something else (usually money, but not necessarily - a swap would also be a sale). A gift is not a transaction. So, with the typical exception of registerable items, like automobiles, there is usually no use tax imposed on someone who received something as a gift.

2. Of tangible personal property (TPP) or taxable services
TPP is tangible, which means it's perceptible to the human senses. And it's personal property. In most states, personal property is defined by what it's not. If it isn't real property, then it's personal property. And real property is generally defined as land and anything that is permanently affixed to land (or other real property) and integrated into the use or value of that real property.

So it's TPP if it is not permanently affixed and integrated into real property. The ship above is TPP. It's really, really big, but it's not permanently affixed to land. And because I took a picture of it*, then it was obviously tangible.

Finally, every state does tax some services. Some states tax many services, other states tax very few.

3. By a retailer
Generally, the sale must be made by someone who is in the business of selling the product or service. If they're not in the business, then they're making an occasional sale. That ship, if sold by a shipping company, who is in the business of using ships - not selling them, wouldn't be taxable because it was sold in an occasional sale. Except that it may be registerable. If so, then like automobiles, the buyer will owe use tax. The state will get those big purchases whenever they can.

4. To the final consumer.
If the sale was to a dealer or wholesaler, then it was for resale. It wasn't sold to the final consumer. The final consumer is generally going to be the person who bought for some other reason to resell, or they are simply the final buyer. Either way, identifying the final consumer usually isn't that hard.

So, to recap, anytime there is a sale of TPP (or taxable services) by a retailer to the final consumer, then you have a taxable sale and either sales taxes or use taxes are due.

Ta da!

Sales Tax Guy

* I took this picture from the center of the Golden Gate Bridge in San Francisco in 2004. I highly recommend that walk. It's beautiful and exhilarating.