Got any questions?

My bad. I'm starting to get more questions via email. Which is OK. Feel free to do that. But I wanted to give you a more convenient place to post something, whether it's a question or comment. Maybe other people will have an answer that's better than mine. I've got a link to this post in the left column, so you can always find it. And please note the disclaimer as well.

One request though. Please don't look at this as "Jim's Law Look-up Service." If a question gets posted along the lines of, "Is freight taxable in Georgia?" then my response will be, "Did you check Georgia's web site?"

And it doesn't have to be that good of a question.

Sales Tax Guy

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Picture note: This was shot at Cantigny, a garden and military museum in the western suburbs of Chicago. I spend a lot of time volunteering there. And improving my people skills.

Carpet Dealers

Carpet dealers, as well as other flooring and tile sellers and cabinet installers, are often considered construction contractors and treated that way. Under this method, they pay tax on their purchases of carpeting, tile, wood, etc. and make no taxable sales to their customers, just as other contractors.

However, you will see variations. I think the reason is the nature of the transaction. Flooring and cabinets are often bought in a retail setting or out of sample books. The customer really thinks of themselves as buying the actual product, and the services of the installer are incidental.

However, in the standard construction contractor situation, the customer doesn't care too much about the building materials. They are primarily concerned with, and think of themselves as really buying, the finished product.

That's my story, anyway.

For whatever reason though, some states do treat the sale of flooring and cabinetry as the sale of installed tangible personal property. The sale of the product would be taxable to the customer just like any other sale of TPP and possibly even the installation charges.

So there are two main variations (with lots of complications):

1. The seller pays tax on the product when he buys it and doesn't charge his customer any tax at all.

2. The seller buys his product for resale, and then charges his customer tax, just like a normal sale of TPP.

Your cheapest source of information on this will be the state web sites. In my experience, most of them have a publication dealing with this situation because it's the kind of thing that citizens (voters) will ask about. If there isn't anything obvious, look for contractor information, or start digging around in the statutes and regulations.

If you're the buyer, don't assume the seller is doing it right. I've met too many of them that didn't have a clue and were doing it the wrong way.

And guys, if you're looking for a way out, just tell her that the sales tax issues are just way too complicated. You had better put off that purchase until you can figure it out.

Sales Tax Guy

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Picture note: You'll understand the last paragraph if you have a look at the photo.

Get those certificates

I had a woman in my class once who told me about her experiences in getting resale certificates. She didn't bother.

She worked for a toy manufacturer. And she worked for the distribution division. She sold only to resellers and distributors. There was a sister company who did sell to the end user through their web page and catalogs. But it was a separate company, separate corporation, separate facility, separate everything except products sold and the parent company.

Her company got audited by, we'll say*, Illinois. During the audit, the auditor asked about resale certificates for all of her sales into Illinois. She said, "We don't get them. Our business model is only to sell to retail stores and distributors. None of our customers buy for end use. Talk to our sister company about that. We don't need resale certificates." The auditor said that she did and pointed out the law. But he was nice enough to give her 60 days to get them (not all states are required to provide this grace period).

So she began to work on getting those certificates. And 60 days later, she still owed Illinois $50,000 for the sellers' use taxes she had failed to charge her Illinois customers. Not because her customers refused to provide the certificates. Her company was big enough to demand and get those certificates. She owed money because some of those customers had evaporated. You see, the retail toy business is pretty volatile. Retailers come and go. She owed taxes on the ones that had "gone." If they're gone, she's not going to be able to get a resale certificate.

But if she had simply done what she was supposed to do, she would have owed nothing.

The moral of the story is very simple: get the resale certificate. Get it before you even ship the goods, because that is when you've got leverage over the customer. Don't wait until later or assume the sales rep will get it. You get it now. Here's a procedure you may want to use.

Then you won't have to argue with your customers or run the risk of them going out of business on you.

PS...before you go all notes on some of your customers, you should read these articles about drop ships. And here is much more information on all forms of exemption certificates.

Sales Tax Guy

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*When I use "we'll say", that means I making it up.

Picture note: The toys shown don't represent the company I'm talking about. It's just a picture of toys. You can see it bigger here.

Sneaky Information Services Gambit

Here's a sneaky auditor trick that I've recently heard about. It's probably not legal; it certainly doesn't make any sense to me. So at least be suspicious of the auditor who pulls this one out of their hat.

In most states, information services aren't taxable. Information services are essentially the sale of third party information. In the olden days, these were delivered in hard copy. Which means tangible personal property.

But these days, the information is usually delivered by electronic means, usually by downloading. These include things like tax databases, stock photography, wire services, credit reports, mailing lists, etc. It's not so much an information service as the sale of intangible property. Note sales of intangible information aren't generally taxable.

However, all bets are off if we're talking about the actual delivery of tangible personal property. A convenient example would be a mailing list sent to you that has already been printed on self-adhesive labels. You are buying tangible personal property. It's not intangible. It's probably going to be taxable.

If you had merely downloaded the list though, in most states it's not taxable. It's not tangible. The sale is gonna be considered the sale of an information service.

In the last year, I've heard reports of sneaky auditors who will argue that, "Yeah, when you bought the information, it wasn't taxable. But then you printed the labels, and that made the information tangible and therefore you owe me use tax."

Which, to me, makes no sense. I can see their point. They'd like to get the tax that you've neatly dodged by downloading it as opposed to ordering it printed. But since the transaction was non-taxable, I don't see how they can make it taxable by a later event like this. You've essentially changed its form on your own. And you probably did pay tax on the CD, labels or paper you used. Using this logic, taking any information you've downloaded, and didn't have to pay tax on, would become taxable merely by printing out a backup copy.

So if you're downloading information and then printing it later, whether it be photographs, mailing lists, credit reports, music you burn onto a CD, , etc., be prepared for this gambit by the auditor. I'm fairly sure they're bluffing, but be prepared to call that sales and use tax expert I keep talking about.


Sales Tax Guy
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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
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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
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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.

Summary:

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
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