Being a small business owner in a state that has sales tax has its own set of challenges. It seems easy at the start. A customer comes in and purchases a product, sales tax is paid to the seller and the seller holds onto the sales tax. The seller carefully makes sure not to spend the sales tax, and then hands the sales tax accumulated to its proper owner, the state, during monthly, quarterly, or yearly deadlines. In Washington, this is done via the B&O report.
Seems simple, but it can get complicated very quickly. For example, what if the purchased items are for the company’s use and they weren’t charged sales tax at the time of the purchase? Does that mean they should purchase all of their items from outside the state? What if they are shipping items to customers in another state? And what if they are shipping items on another company’s behalf, like drop shipping?
These are just a few of the common scenarios I have encountered, and would like to discuss in this article. However, a quick disclaimer. I am not a tax professional and cannot advise you on what you should or should not do for your situation. I am simply sharing the experiences I’ve accrued for informational purposes. If you have a specific situation that needs advising, please reach out to your tax professional or your state’s department of revenue for a formal ruling. In Washington state, this can be found at https://fortress.wa.gov/dor/efile/SecureForms/content/contactus/email/rulings.aspx.
Scenario 1: Purchasing items from out-of-state for use by the company in-state.
The first question is whether the items purchased are for resell or are to be used by the company. It is likely for their own use if they are the “end user”. The end user is the company or individual that uses the item at the end of the resell process. For example, a resell company has a resellers permit, but they are not reselling the computer they use to run the business. In these cases, the company is the likely the end user, so something called Use Tax would need to be set aside as a liability to pay out to the state.
Use Tax vs Sales Tax
Use tax and sales tax in WA state is currently the same rate, so I see these terms being used interchangeably. However, there is a subtle difference. For example, sales tax is tax that a seller obtains from the consumer (user) on behalf of the state. A seller doesn’t typically pay sales tax; they just hold onto it temporarily as the middle man. Use tax, however, is something that an end user pays directly to the state when sales tax was not collected. So essentially, the middle man (the seller), is completely cut out of the loop. In Washington, both of these taxes are remitted to the state via the B&O report.
But what if it is an international purchase?
International purchases still fall under the same category as out-of-state purchases. If it was purchased internationally for use by the company or individual, then use tax will likely still need to be accrued and paid.
But what if sales tax is paid in another state?
Use tax is still due for purchases made in states where there is no sales tax, or the sales tax rate is lower than Washington state. However, the amount of sales tax paid to that state would be used as a credit against the total amount due on the reporting form.
Scenario 2: Seller’s responsibility versus purchaser’s responsibility.
According to the tax specialist with whom I spoke, in the eyes of the WA Department of Revenue, the primary responsibility of the seller is to charge sales tax when a current reseller permit is not on file for the purchaser.
But what if the customer is not buying the items for resell purposes and they provided a resellers permit?
It may happen from time to time that the purchaser is not clear about what their responsibilities are regarding items they purchase for resell versus items they purchase for their use. For example, a hair salon purchases organic shampoos at a local seller. They have a reseller permit on file with the seller, so they don’t pay sales tax. However, they use some of their stock when servicing their customers instead of reselling it. In this case, they likely need to pay use tax for the product they use, but not the product they resell.
If the seller is audited in this case, then the state would likely agree that the seller completed their due diligence by having a reseller permit on file. They were not responsible for collecting sales tax. However, if the customer is audited, then the state may decide to fine the customer for unpaid use tax going back as far as seven years.
Scenario 3: Shipping items to locations within Washington state.
When shipping items, the location where the items are shipped is usually the location needed to be used for tax rate. This may be a different location than where the seller is located. It may also be a different location than where the purchaser’s billing address. This can complicate the bookkeeping for a company. Many businesses set up one sales tax item in their bookkeeping based on the tax rate for their location and then charge that rate to everyone. The actual way to set up sales tax correctly is to have a separate sales tax item for each location where products are being shipped to… and then to update it on a regular basis as sales tax rates change constantly. I use the tax rate lookup tool app to make sure I am charging the correct rate.
Another solution is to look into a service like Avalara or hire a bookkeeper to keep it all updated. Point of caution, make sure the bookkeeper clearly indicates in their engagement letter that they are providing this service. I have seen many bookkeepers do this incorrectly, so it is best to never assume, since it is the company that could ultimately pay the price for underpaid taxes.
But what if the purchaser is out-of-state and the shipping location is in-state?
Tricky one! When I brought up this question to the tax specialist at the WA DoR, she immediately asked if the purchaser is licensed to operate in WA state. I didn’t have that information, so she said that sales tax should be collected. There are some complications, but the safest answer is that if the shipping location is in WA, have a resellers permit on file regardless the billing location. If there is no resellers permit, then charge sales tax. The out of state purchaser can then pass that cost along to the drop shipped customer.
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Christina Young is a professional bookkeeper based out of Seattle, WA. Her business, Lighthouse Ledgers, is focused on helping small business owners spend less time on bookkeeping so they can spend more time on the things that matter in their lives.
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Disclaimer: Articles are educational only and based on opinion, experience, and research. This is not to be interpreted as legal, tax, or financial advice. Please consult with the services of a professional tax advisor, financial advisor, or legal advisor before making important business decisions.