Sales Tax

Do I Need a Resale Permit and Should I Use Resale Certificates?

Yes, if you’re going to have taxable sales you’ll be required to have a Resale or Sellers Permit number and to collect and remit sales taxes to your state.

Upon applying, you will be issued a resale number to be used when filing your sales tax return.  You can also file this number with your suppliers (on Resale Certificates) to avoid paying sales tax at the register when making purchases for resale.

I choose not to file Resale Certificates with my suppliers.  Because of this, I pay sales tax on my materials even though they will be resold.  The benefit to me is that I have a much smaller sales tax bill when I file my sales tax return.  Why do I owe less?  The reason is simple: my tax liability is smaller because I am credited at the end of the year for all of the sales tax that I paid on those purchases.

For example, if I sold $20,000 of taxable materials to my customers last year at the 7.5% tax rate, I would have collected $1,500 in sales tax from my customers.  However, let’s say that those purchases for resale cost me $16,000 on which I paid $1,200 in sales tax at the time of purchase.  At the end of the year I would only owe $300 in sales tax to the state instead of the $1,500 that I collected from my customers.

$20,000 x 7.5% = $1,500 collected from customers.

$16,000 x 7.5% = $1,200 paid at time of purchase.

$1,500 – $1,200 = $300 sales tax liability.

If you choose to give resale certificates to your suppliers to avoid paying taxes on your purchases you will end up with a larger tax liability at the end of the year ($1,500 vs. $300).  Additionally, states base the frequency of your returns on the amount of sales tax due.  You may find yourself being asked to file more frequently (quarterly vs. annually).  Ugh, that would mean more tax planning and additional paperwork.

One more added complication of purchasing on a resale certificate is that you will be liable for sales tax on any of the tax exempt purchases made for resale that are later withdrawn for personal use.  The total purchase price of these items must be tracked and entered into the tax return to correctly calculate your tax liability.

For my business, I’ve decided to just keep it simple and avoid the use of resale certificates, effectively paying my sales taxes as I go.

Are Labor and Materials Sales Subject to Sales Tax?

Since every state has different guidelines, the best suggestion I can make is to use the local state sales tax office as a resource and follow their instructions to the letter.  I am lucky enough to have a state office located in our city so I opened my account in person and asked a lot of questions.

Collecting the correct sales tax can be tricky and the rules are full of pitfalls.  Is labor taxable?  What about materials sales?  If you tell someone that the cost of the job will be $500 is the entire amount subject to sales tax or just the portion that covered the materials?

If your materials and labor are both taxable, your sales tax liability will be MUCH higher.  In my business, labor accounts for about 85% of my total revenue so the stakes are high.

In California, because labor is generally not taxable and materials sales are, you have to be very careful how you quote prices and fill out your invoices.  You must clearly break materials out from labor when quoting the work and while totaling the invoice. If you don’t you might be liable for sales tax on the entire sale.  I always quote labor and materials as separate items.

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