A Guide: Sales Tax When Buying Retail for Interior Designers
What to do when buying retail, paying vendor tax, and subsequently reselling the item. Additionally, there are resources by state below.
Navigating sales tax can be one of the most intricate aspects of managing a business. With myriad rules and jurisdictions influenced by factors such as business address, ship-to location, and economic nexus, it's easy to find oneself tangled in complexity.
Ideally, firms that plan to resell items have resale certificates on file with all their vendors and avoid paying tax when acquiring products. This eliminates any ambiguity when it comes to sales tax. However, we understand that this isn't always possible.
Taxes on taxes
One frequent inquiry concerns the dilemma of handling sales tax when sourcing items from vendors who either don't have your resale certificate on file or do not accept them (cough, we're looking at you, Etsy). The sales tax paid to acquire an item is called vendor tax. In this situation, a business ends up paying sales tax on procuring an item that will later be resold and taxed again, which we call client tax (yes, it feels like double taxation).
To be clear, even if you already paid vendor tax when you procured an item, you still have to collect sales tax on the entire new amount when you resell the item to your client. Collecting sales tax only on the additional markup you added is not correct. Taxes should not be "blended" amongst items; they should be taxed at the appropriate rate and easily identifiable.
But is this really the case?
In short, yes. It's accurate that sales tax must be collected on the entire selling price to the client. Our friends over at TaxJar have also written about this. However, there's a silver lining—depending on the state tax code, there may be opportunities to recover or receive credit for the sales tax paid. Since each state operates differently, it's essential to consult your tax professional for confirmation.
Here's the rationale behind why sales tax is still charged on an item that has already been taxed:
Sales taxes are calculated as a percentage of the item's base price. Even though sales tax was paid on the acquisition, reporting guidelines stipulate that the appropriate tax percentage must be levied on the sale price. Attempting to deduct the vendor tax paid from the tax owed would result in an arbitrary percentage, raising red flags during filing. Beware of project management software that inaccurately calculates sales tax by deducting the vendor tax paid from the tax owed. They may call this a "markup only" tax.
Since vendor tax has been paid, it should be considered part of the cost of that item. There may be a chance that some of the tax will be recovered, but a conservative approach is to consider it a cost and pass it along to the end user. The acquisition price of an item remains distinct from its selling price to the end user.
States are indifferent to whether sales tax was paid to another state. Your home state/jurisdiction is primarily concerned with whether the item was sold within its nexus, necessitating tax remittance on the full sale price.
What does that mean in practice? What should I do?
The easy answer is to follow the advice of your accountant, CPA, or tax professional. Regardless of which path you take below, you must charge the client tax on the total amount of the item's sale.
There are two main pathways to handle vendor tax:
If your state does not allow for tax recovery or you feel it’s not worth the hassle, regard it as just a cost to cover when you set a selling price (aka eat it). This is the safest, least time-consuming pathway and what most folks do.
If your state allows sales tax recovery, plan to recover it and keep meticulous documentation. You would record vendor tax paid on purchase orders but exclude it from your item cost estimate in your scope of work since you plan to recover it. The downside is this is a bit more work, so do it if you think it’s worth the extra admin time.
Resources by State
Below is a list of states that may allow vendor tax recovery and links to their taxation websites for further guidance. For reference, five states have no general, statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
This list is not exhaustive, so you should check with the states where you have nexus and their respective tax departments for confirmation. Additionally, the process can be very complicated and requires all documentation of the vendor tax paid.
An example: Guidance from New York State
The New York Department of Taxation and Finance is an accommodating bunch that can quickly help answer sales tax questions. Here's a summation of the options within their jurisdiction.
Sales tax must be collected and remitted based on the entire sales price.
Firms can apply for a sales tax refund for the tax they paid acquiring the property with a Certificate of Authority from form AU-11.
Credits can be claimed against taxable sales for sales tax paid when acquiring the property.
They can be reached at +1-518-591-5283 to assist with filing sales tax forms and for general sales tax guidance.
Cost Factors in Action
The easiest and safest methodology is to treat sales tax as a cost of the item. This will allow for clean reporting and reduces the chance of erroring and triggering an audit.
Cost of an Item for Resale
Purchase price
+ Vendor tax
+ Other costs (shipping, handling, delivery, service charge, etc.)
= True cost of an item
Calculating the Price for Resale
True cost of an item
+ Markup
= Selling price
Tax Calculation
Selling price × client tax rate = sales tax required to collect and remit
Vendor & Client Tax in Materio
Materio allows for recording vendor tax and, when connected to QBO, can be mapped to a COGS: Vendor Tax account that could be useful when filing for recovery.
Here is an example of a purchase that was taxed when purchasing, and then the system calculates all cost factors to a total cost, to which the markup is applied.
The total taxable amount is comprised of the cost factors. In this case, the unit cost, shipping, delivery, and sales tax.
Summation of cost factors = True Cost
Item cost + vendor tax = True Cost
$1,000 + $92.50 = $1,092.50
Cost + Markup = Selling Price
$1,092.50 + ($1,092.50 × 20%) = $1311 (highlighted in the green box below)
Here's a screenshot that shows how we can input and see the various cost inputs, vendor tax, markup, and applicable client tax. We can instantly see the client price (sans tax) in the top right. The client tax will be $1,311 × 9.5% = $121.27 (top-right of the orange rectangle).
Need more help with accounting or taxes?
We have partnered with a few trusted accounting resources and would gladly introduce you to them. Please reach out to hello@materio.co, and we'll connect you.
