Sunday, May 31, 2009

Accounting and the Container Exemption

I got this tip recently in a seminar. I've never heard of it before, but I thought I'd pass it on because it makes sense

The logic behind containers being exempt is that the box, bag, carton, pallet and other packaging materials were bought for resale. They're essentially sold with the product to the customer - they're ingredients. But a sharp auditor might ask about the accounting for your packaging costs.

In order to be able to argue that the container is part of your product, you may want to account for it that way. In other words, the theory is that you should be including the cost of your packaging materials and containers in cost-of-sales or cost-of-goods-sold, where your other product costs are.

Now, if you're like most companies, those costs are probably being included in your sales and administrative expenses. And you might have some trouble convincing your CPAs of the sound, logical and insightful thinking behind this recommendation.

But it's worth considering to be able to reinforce why your packaging materials aren't taxable.

Note that you should check how the container exemption works in YOUR state. And DO talk this over with your accountants.

Sales Tax Guy
See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Wednesday, May 20, 2009

The Resale Exemption

This is really almost not an exemption. That's because purchasing for resale is fundamental to the concept of sales and use taxes (SUT). SUT is usually a tax on the final consumer (or at least the transaction involving the final consumer). Since someone buying product to resell isn't, by definition, the final consumer, there shouldn't be any sales or use tax. Henceforth, the resale exemption.

If you buy something that you're going to sell to someone else, you shouldn't pay sales or use tax on it. You should provide your vendor with a resale certificate (that's what it's typically called). This gives your vendor reliable assurance that you're not to be taxed and why.

Then, when you sell your product, you must charge your customers tax and remit it to the appropriate state. Unless, of course, your customer is also buying for resale, in which case he/she needs to provide you with a resale certificate.

This is called the resale exemption. This is not absolutely universal, but it's pretty dang close. And it's really not an exemption like food, non-profit organizations, etc. It's fundamental to the entire concept of sales and use taxes.

There are variations on this rule. For example, in most states, real property construction contractors who buy building materials for their projects are considered the end users and are not buying for resale. Lessors, in most states, buy their property for resale because they will be charging the lessee tax on the rental or lease charges. And there are a few states where people, who provide taxable services, can buy some of their materials tax free using this exemption. Finally, the ingredients exemption for manufacturers, as well as the container exemption, are natural extensions of this exemption.

Sales Tax Guy
See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Tuesday, May 19, 2009

Brothers and Sisters, let us now discuss...containers.

When you buy a can of beer, what are you really buying?

When you purchase the can of beer, you're also buying the can, aren't you? Isn't the can sold to you with the product? Therefore, the can is an ingredient in the product called, a can of beer. Therefore, logically, shouldn't the brewery be able to buy the can for resale, just like the ingredients for the beer?

Containers that are sold with the product to the customer are generally not taxable.

If you go to a restaurant and they sell you pop (or soda, whatever) in a cup, they are able to buy that cup for resale. Because it is sold to you with the delicious beverage. But if you get your drink in a glass or a china cup, the container wasn't sold to you with the beverage and the seller should have paid tax when they bought it.

Returnable containers, like a keg of beer or a tank of propane, are generally taxable because they are not sold to the customer with the product. They are bought by the seller, empty of course, and used over and over again. The seller pays tax on those containers because they use them to transport their product to their customers.

But a container that is sold with the product to the customer, is not taxable when purchased by the seller.

By the way, this isn't just a manufacturing exemption. It generally applies to anyone who sells products. The grocery store doesn't pay tax on the bags they put your food into when you make a milk run.

That's the general rule, backed up with logic. But there are significant variations from state to state, mostly with the definition of container and customer.

Just about every state will say that the can itself is exempt. The container that actually touches the product and/or is received by the final consumer of the product, is almost always exempt when bought by the seller of the product.

How about this shipping container?


Usually the box would be exempt, if sold to the customer with the product inside the box. When I got this box, (which I carefully saved unopened so that I could photograph it and use it in this blog) the vendor didn't expect me to return it to them. I got the contents, plus a nice empty box. But, say the seller purchased boxes to ship materials internally from one division to another? In that case, the container would be taxable. It wasn't bought to sell with product to the customer.

But some states, as mentioned above, would not exempt the box, only the container touching the product. If the company shipping this box was in one of those states, they would have had to pay tax since the box doesn't touch the product. What the box contained was software (that I paid tax on...don't worry). In some states, only the software box containing the CD would be exempt, just like the can, because only the software box touched the product.

Let's say that box containing the software was sent to a dealer, who would then put the software on the shelves in their store. In a few states, the box would be taxable because it didn't get shipped to the final consumer.

And then, there's the beloved peanuts.


Some states have a problem with peanuts, bubble wrap, excelsior, etc. because it's not touching the product. The box might be exempt, because it's really containing something. But the peanuts are not a container, therefore they don't qualify for the exemption. In fact, they are being contained.

Shipping labels are often differentiated from marketing labels, or inventory control labels which are usually taxable.

And finally, there's skids (or pallets - whatever).


Pallets are barely containers. You could say that they are the bottom part of a container made up of the stretch-wrap on 5 sides and the pallet on the bottom. Might be tough, though.

Often, the state's rules don't use the term container, they use a variation on wrapping supplies or shipping materials. That's a good thing because then you can pretty much fold everything I've talked about into that definition, as long as the wrapping materials are sold with the product to the customer. But that also leaves room for the auditor to wiggle as well. I can see an auditor trying to make the case that the peanuts really aren't wrapping the product. I'm just sayin'

When I'm researching a state, I'll look for mention of specific items, like dunnage (a really obscure term for peanuts) and pallets. If a state exempts those things, I figure we're home free.

Hopefully it's obvious that people who sell services usually don't sell product. Therefore, there's no container exemption for them. Your CPA doesn't get to buy the envelopes, in which he sends out reports, tax free. He really hasn't sold a product. The report is really just the work product of his services. Except that, in a few states, dry cleaners bags are exempt when bought by the dry cleaner. Go figure.


1. If you sell stuff, and you buy containers, you should see if you qualify for the container exemption. A lot of new businesses don't realize that this stuff is exempt to some degree.

2. You need to get as much information on the laws in the state where you receive and use those containers. What do they consider a container? And does the container have to get sold to the final consumer?

I've got a few more issues to talk about, but you've gotten enough to chew on for now. Stay tuned.

Sales Tax Guy
Please see the disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Thursday, May 14, 2009

Where's the best state to buy stuff?

I had an interesting question emailed from an out-of-country journalist. As part of his research, he was trying to factor sales tax issues into a discussion about where to buy electronic equipment.

The question raises two potential answers.

1. If the buyer is visiting the US from another country, then the easy answer is one of the five states that don't have a sales tax. The purchase is made in, say Oregon, and then the buyer takes it back to their country. No sales tax. Done. But there will probably be taxes when the buyer gets home. Sorry, I can only keep track of 46 different state sales taxes. Some other country, can't help ya.

2. If the buyer lives in another state (in the US), then it really doesn't make any difference where they buy the camera. Because we have this dandy thing called use tax. Even if they buy the item in Oregon, they'll still have to pay use tax when they return home. Because they used the camera in their state when they returned. The buyer probably won't pay, but that doesn't change the legal requirements.

And I'm sure the journalist wouldn't want to suggest to his readers that they violate the law by not paying the taxes they legally owe.

Sales Tax Guy
See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Picture note: That's the Tribune Tower in Chicago. The journalist obviously wasn't from here, but that's the closest picture I could come up with.

Monday, May 11, 2009

Trivia Question

It's getting late. Your party has been fun, but now you'd really like everyone to just go home so you can go to sleep. You've got to do sales tax returns in the morning!

I have the solution. Start a trivia game, and here is the first question:

"Who can name the five states that don't have a sales tax?"

Trust me, they'll all go home. I've tried it. It works.

Oh, if there is some weirdo who wants to play, the answers are:
Alaska, Oregon, Montana, New Hampshire and Delaware.

And for the picky among you - there are other taxes, but not a general sales tax.

Sales Tax Guy

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!