Navigating Sales Tax
State Departments of Revenue are in a budget crunch and sales tax regulations are changing to increase the revenues to the states. Learn how sales tax audits can destroy businesses and what you can do to protect yourself.
Bordeaux & Bordeaux CPAs is a Supplier Member of CCSA (Contemporary Ceramic Studios Association) which is a organization representing paint your own pottery studios (PYOP) and ceramic arts businesses. Donna Bordeaux, CPA provided the webinar to CCSA association members as a benefit of their membership in the organization. Their CPA firm specializes in growing PYOP studios with industry specific key performance indicators by helping them grow their studios and minimize the impact of taxes.
All right, we will go ahead and get started with our call today. Thank you for joining us. I am Donna Bordeaux from Bordeaux & Bordeaux CPAs, and we are going to be talking about sales tax and all of the exciting confusion that happens with sales tax along the way. Our session today is for members of CCSA, and we’ll be recording this session so that we can play it back through our website later on and have it for the CCSA membership. Let’s get started.
First off, a little bit about me and my team. I am a CPA, my husband, Chad, is also a CPA, and we are the Bordeaux and Bordeaux. You will also talk with Nancy here at our office. She is our admin person, and she also happens to be my mom. Probably you won’t hear today, I think it’s nap time, but Dixie is our security force here in the office, so occasionally you may hear her bark in the background. My office is physically located just outside of Charlotte, North Carolina, and I am in Lake Wylie, South Carolina.
We are going to get started and talk about sales tax here for a moment. Just some general ideas to start with. First off, sales tax is a very complicated issue, and one of the reasons it is so complicated is because it is a state issue, so it varies by state. If you are in multiple states for businesses, which most pottery studios are not, that can provide some big challenges, but we’re going to be just dealing with one individual state today.
One of the big problems is that every state wants their piece of the pie. States use this money to fund their coffers, and they’re all very restricted on their budgets lately, so they want to make sure that you are charging the sales tax appropriately because they need their money for their budgets, and they don’t want it to go to the wrong state or, heaven forbid, not be collected. Many people talk about sales tax as an expense. First off, it is not an expense. You are just a pass-through agent who collects the tax for the state through your business, and passes it along to the state. If all is done well and correct, it should just be a pass-through collection, so it should not provide any burden to you as far as a cost of operations. If you’re to be collecting sales tax and just remitting it to the state, you do not get any payment for being a collection agent of the state, unless the state offers a small discount, but it should not cost you, as a business owner, money unless you do things wrong, and that’s where we want to keep you out of trouble.
Let’s talk a little bit more about sales tax. There’s a lot of confusion about resale certificates, so I want to spend a few moments talking about resale certificates and what those are. First off, if you are going to be purchasing anything that you will in turn resell, you should not pay sales tax. Ultimately sales tax is only to be paid on the end user of the purchase. If there are multiple buyers along the way, [inaudible 00:04:01], those should all be sales tax exempt in a perfect world. Usually if you’re buying from your suppliers from Chesapeake or Biscayne ports, or any of the major suppliers, they’re going to, when they set up your account, they will set you up as sales-tax-exempt and not charge you sales tax.
Where you need to watch for that is when you make purchases at commercial places like Michaels, or Lowe’s, or Jo-Ann’s. If you are purchasing products that will be incorporated into something you will resell, you should present your resale certificate to that vendor, and they should not charge you sales tax on that material. Where it becomes confusing is when you’re buying multiple things in a purchase and some are for resell and some are not. A lot of people also get confused, they think Sam’s Club and the big wholesale clubs will accept your resale certificates and put those on file. You should not be using a resale certificate for anything that is part of your supplies that would just be used, like coffee, or paper towels, or any other things that are not resold. Okay? Now, coffee’s a different issue if you’re reselling it, but in most cases if you’re just offering complementary coffee or using it for your staff, you should be paying sales tax on that.
What do you do if you need a resale certificate? First off you’ll want to download the resale certificate from your state’s Department of Revenue website. Each state has their own form, and basically you’ll be listing your sales tax identification. There’s a lot of confusion. I’ve seen people list their Federal ID number. It is not a federal number that you need there. It is your state sales tax ID number that should be listed on your resale certificate.
There is a multi-jurisdictional, that I have a small picture of there on the right, that is used when a company has multiple states they operate in. You probably do not need this, but in a pinch if your state refers back and says just use the uniform sales and use tax exemption certificate, you can just do a quick web search and you will find that out there. It’s a pretty standard form, and it’s been the same for several years.
I would highly suggest that you present this resale certificate to your vendor in advance of purchases, not just at the cash register when you roll through at Michaels. Chances are that sales clerk will not have a clue what to do with it. They may need to have a manager do something, or set up your account in a certain way, so that your purchases can be exempt, if needed.
If you overpay your sales tax, you go to Michaels and you make a quick purchase and don’t want to go through the hassle, you cannot get it refund unless you get it refunded from Michaels. You can’t reduce the sales tax collections that you pay on your monthly report, and you cannot apply for a refund through the state, so you want to take care to get this set up, and just know that there will be a little bit of work on the front end, but if it’s a vendor you’re going to use consistently, it’s definitely worth the money.
Then let’s talk a little bit now about collecting of sales tax. The biggest question we get, again, is what should be taxable. Should classes be taxable? Do I have to charge sales tax on convention, I’m sorry, on camps, studio fees? The answer is it depends, obviously, because the rules are different by every state. Some states are much more aggressive than others, others are pretty laid back. In most cases you’ll find that the states are getting more and more aggressive, so if you checked this out a few years ago, you’re going to want to check it out again because the rules have changed. I’ve noticed specifically over the past two or three years they’re getting much more stringent in making a lot of rule changes to sales tax, so I would highly suggest that you set this up to check on it.
If you’ve got something that you are not collecting sales tax on right now, I would suggest that you check it, and that you get written evidence. If you call the state and ask them for advice on this, and they tell you, “No, that doesn’t have to be taxable,” ask for follow-up. Where can I find that written on your website? Can you lead me to that point so that I have written documentation to support this? Again, always right down that rep’s name, write down the day, the time that you called. Have as much evidence as possible if you’re relying on the advice of somebody that you called in on, but always have the written documentation where they got their answer, because if you get into trouble in a few years, guess what, that rep is not going to be able to be found, they’re going to say they didn’t say that, or they probably don’t even work there anymore, so always have written backup for your choices there.
If in doubt, it’s probably taxable. Remember that, although we don’t want to burden our customers with extra taxes, if you don’t collect the sales tax, and you’re later on charged that sales tax through an audit, it becomes an expense to you. You are responsible to pay it if you did not collect it, and there will also be interest and penalty on it. Ere a little on the side of caution if need be. If you don’t have specific advice as to where something is not supposed to be taxed, you should be charging sales tax on it. Most of the time the state rules and regulations indicate that everything is taxable unless there’s an exemption that specifically applies to that one thing, so make sure that you have evidence of where you got that exemption if there’s something you are not charging sales tax on.
In general, and again I hate to even talk about generalities when it comes to sales tax because it’s so different across the board, but in general a tangible product is always taxable. That is one thing that is pretty consistent across all states. If I can touch it, it should be taxable. If you sold a mug, you’re going to need to tax it. The real question comes into play if you had a studio fee. You didn’t sell a studio, you sold time in the studio, but that becomes a little bit blurry. In most cases, except for a few states, if you have labor only, it it usually not taxable.
Now, you want to check, there are some states that are taxing labor now, for example, Ohio. Labor that becomes a component of the final product is where everything gets a little hairy. The trend for most of the states now is to go forward and tax this, and you’ll see a lot of recent tax legislation has led those items to be taxable, so when we talk about, say, studio fees here, or custom painting fee, or even teaching of a class in a lot of cases, those things where the labor becomes a component of the finished product are taxable in most states now. Again, this is where we usually do the research, and I recommend that you get written evidence, one way or the other, as to what you need to do for your particular state, but the trend is that states are taxing this.
When we talk about the aggressive versus the non-aggressive states, for example, I know that in Illinois they are less aggressive on the labor component, which is surprising, because they’re pretty aggressive on the rest. Illinois, for example, does not tax your studio fee or a class, but if the child takes something home in the class, or you have a ladies’ night that results in a finished product, that’s where your questions come in to play.
Here’s a little bit of a run-down for you, and these all say usually because your state should be checked to verify, but these will give you some clues. If you have a studio fee and you do not charge tax on it, definitely make sure that you have written proof of that exemption, because it is usually now, yes, that it should be taxed because it’s a component of a finished product.
The camps and classes, yes, again because they usually result in a product. That kid is going to take a product home with them from a class, or you’re doing a canvas class and they’re going to take that canvas home with them, so those are usually yes.
Food and beverage, if you serve and charge for this in your studio, yes, usually it is taxable. You do also have to watch for some additional prepared food and beverage taxes across the country. Sometimes those are local taxes as well. When dealing with alcohol especially, you got to watch they’re specific taxes that apply there sometimes, and sometimes even specific licenses you’ll need to have for food and beverage.
You will often have schools, churches, others come in and say, “Well, I’m tax exempt.” Who is tax exempt actually differs by state. Sometimes schools are exempt and sometimes they’re not. Sometimes you have to collect the sales tax from them and they apply to their state to get it back. Ultimately, to protect yourself, you cannot just take the word of somebody who appears before you and says, “Oh, I’m tax exempt, don’t charge me sales tax.” If you’re going to exempt a particular purchase from tax, you need to have a resale certificate on file from that vendor before you exempt that from sales tax. Otherwise, you’re taking a risk, and if you’re audited on this and you can’t provide that resale certificate to show why you didn’t charge tax, you’re going to probably have to pay the tax in the audit, as well as any interest and penalties on that, and that can be very significant, so make sure that you require the resale certificate in front.
Okay, so here’s the big question. What if I get it wrong? What if I didn’t know? First step, fix it immediately. The next step is you’re going to have to wait it out a little bit. Hopefully you won’t be audited. If you’re audited, then we’re down to pray for mercy. If you’re in doubt, go ahead and collect the sales tax. If you can’t find a specific written exemption, or they can’t lead you to a specific written exemption, collect the sales tax, because, again, if you don’t collect it, and the state says you should have, sales tax will become an expense to you, and a very expensive one.
I hope this helped resolve a little bit of the issues about sales tax, and I often get a lot of questions about what it is we do. We don’t just do accounting. Our role is to try to help you solve problems. Make sure, is my pricing right? How can I pay myself more? How can I find good staff, and that’s a loaded question? What number should I be looking at? Should I move to a better location? Should I pay more in rent, should I pay less in rent? All those are general questions, and we work with studios specifically and specialize in that, so we can definitely provide you some good solid advice and information there.
If you have some more questions about how we work with studios, I definitely would point you in the direction of our website. Go to pyopaccounting.com. You’ll find a lot of our blogs there, have some great posts like this session today, we have some other webinars posted there. We’ve also written a book, the “10 Most Expensive Tax Mistakes that Cost Studio Owners Thousands” specifically for studio owners. We would love to help you. If you have any questions at all, please feel free to let me know. Shoot me an email and tell me what’s going on, and I’ll do my best to help you.
I want to open it up here on our mics for a few questions if anybody has any. I thank you for joining us today. This is the end of the recorded session. I’ll turn that off in just a moment and I’ll unmute everybody, and if you have questions, please feel free to jump in and let me know, and I’ll be happy to stay on the line a few more minutes and discuss those with you. Give me just a moment.