¶ Understanding Sales Tax
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Hey , this is Daniel , the founder of Bookkeeping for Painters .
This is Jonathan advisor with Bookkeeping for Painters . How's it going today ?
Jonathan Pretty good . How are you doing , daniel ? Doing well ? So today we're talking about a really sexy topic sales tax and some folks they never have to worry about this the whole time they're in business . Where other folks , it can be like the bane of their existence .
As a business owner , you definitely want to know what sales tax is , even if it doesn't apply to you . You just want to be prepared , because if you happen to do work in a separate state that you don't usually do , you just need to be aware of this concept .
And then , of course , if you're in one of these states that has sales tax , you need to know it pretty well , and not just for compliance purposes , making sure you don't get in trouble . But there's also some ways you can use it to your advantage , use some of these laws to your advantage and actually save money and tax .
So it's kind of a cool niche topic that I think can help folks out a lot by understanding it .
So today I think we're going to go through what is sales tax , how do you collect it , what are some of the ways you might get in trouble , but what are some of the things you can do to use it to your advantage , and then we'll talk about how you can get started with sales tax and how to track it .
But first of all , hey , john , can you walk us through , since you're the subject matter expert on this topic , what is sales tax and how is it different from another type of tax , john ?
Yeah , absolutely so . First thing , sales tax is a state and local tax . So you'll actually hear it referred to salt state and local tax . Sales tax is imposed first at the state level in 45 of the 50 states . If you're lucky and you're in New Hampshire , alaska , oregon , delaware and Montana , then you're kind of lucky .
You probably don't have to deal with this as much . But in those other 45 states you have some sort of sales tax either at the state level , the county level , in many cases both .
And so that's the bare bottom line is it is a state and local tax typically charged on purchases of what's called tangible personal property , basically anything you can touch , feel , taste and sometimes services . So it really depends on the local level it will dive into .
Yeah , and I know for most painting businesses they're doing a service and you got sales tax . When you go to the grocery store when you're purchasing your Mountain Dew , there's a sales tax on . Everyone pretty much knows that . But in most cases , in most states , like you're saying , but services if you're a painting business , you're providing services .
A lot of states don't require you to tax your services , but some of them do . So it's a little confusing . And so what you were saying is it sounds like some states they classify . When you do provide services that improve tangible property , tangible personal property , you might have to actually charge your customer .
When you paint their house , you might actually have to tack on some sales tax , whether that be for the service or maybe for the product , depending on the state . Is that right ?
That's right . Yeah , A good quick little litmus test would be for painters who are buying paint from Sherwin-Williams , for example Does Sherwin-Williams charge you sales tax when you buy that paint ? So that's one litmus test . As far as whether or not tangible personal property is taxable , but every state is different . Some states will exempt it .
Typically speaking , all states and their laws are written in the way that everything is taxable . Then there's exemptions that allow certain things to not be taxable . So it really depends on the state diving in to determine . Texas is a really good example of things where it gets a little bit iffy .
They have exempted residential but in terms of commercial properties those services are taxable . So it really just depends on the state you're in . But it really gets questionable and very difficult to navigate when you're a service contractor , just like painting here .
Yeah , that rule of thumb that you're saying if you go to Sherwin-Williams and you buy some paint , if you don't get to charge sales tax , what does that mean for you ?
Typically speaking , if you have not already given them some reason to not charge you for there's resale certificates all that we'll cover later . But if they're not charging you sales tax on the paint , then there's a reason why . It's possibly that the state has already exempted that because it's typically going into real property or something of that nature .
But there's a reason why Sherwin-Williams is not charging you sales tax on that paint . That's probably . You probably already know why if you're in that state . But that's a great litmus test because that is a tangible personal property . Whether or not it's getting incorporated into real property is a different issue .
But if you're not getting charged at that first level , then you're probably pretty safe that you're not charging your customers already .
Okay , cool . So sales tax it's something you got to potentially charge on your services and sometimes on your product , but you got to know your state rules is basically the bottom line for this . This , I think , is especially true for folks that live close to a border , especially if you live on the border of Oregon and Washington .
You might do some work in Oregon and then you also might drop down and do some work in Washington . Really understanding both states is super important , especially in that case because one state doesn't worry about taxes on services , while the other one everything's tax on services . Could you talk a little bit about that situation ?
Yeah , absolutely . As we mentioned earlier , these are state and local taxes . The bottom line here is this is a tax that's due from the customer . The person who has the end is using that product or using that taxable item . That's who owes the tax .
But the states look at you as a business owner and say we can't really go to every single client or every single homeowner and audit them . They begin to look at businesses for audit purposes and say are you helping us basically claim this tax and get this tax ? So it's really important for every state you're in , every state you operate .
Even if it's just one job , that is in many times enough to create what's called nexus . There are two types of forms of nexus , but that's what the governments call them . It's physical and economic at nexus . So this is why , you see , there was big issues with Amazon back in the 90s about whether or not they were charging sales tax .
Sometimes websites will not charge you sales tax . That gets into a whole nother area of what's called use tax . But the bottom line here is that you really need to know when you go into another state , another county even , what are those laws , what are the state tax laws for that particular area that you're in , because counties have their own laws .
Even just crossing county lines could mean one time it's taxable and one time it's not . So it's really an area of importance to really get in .
But if you're doing things across state or county borders , then it's really important to look at what are those tax rules there , because as soon as you cross the border , they're going to say , hey , you actually should have been collecting sales tax all along .
Yeah , you definitely need to pay attention to this because , like you said , you're , as the business owner , on the hook for the sales taxes . So in the past we started working with this painting business out of Washington . They realized that they should have been collecting sales tax for several years .
It was a significant emotional event to find out how much money they were going to have to owe to back pay all the sales tax that they didn't charge the customer . So it didn't collect from the customer . So , yeah , I definitely don't want to be in that situation where you're having to go back for years and pay that tax bill because it's not pretty .
Yeah , it's bad enough paying taxes , but it's even worse when you have to pay somebody else's taxes , and bottom line that's what sales and use tax is . It's oftentimes tax that was owed by somebody else that you should have gotten from them , and now it's too late , right After the transaction is done . You can't go back and collect from them .
But now you're going to pay tens of thousands of dollars , oftentimes to pay for taxes that you could have been collecting all along .
Yeah , it's rough , but the good news is it's not all gloom and doom . There are some ways that you can actually use these state rules to your advantage and actually save money because of these rules . Could you enlighten us on some of those topics ?
Yeah , absolutely so . We were actually just working with a client recently out of California . You know there are a couple states that you know don't allow this . You know Florida and Washington are one of them . But you know , basically the government kind of looks at you as either a contractor who is providing a lump sum contract , or a time and material contract .
There's also cost plus those are kind of more of the time and material . But basically they look at you in one of those two ways and it's whether or not you are , if you're a lump sum , how they look at you as a service provider and you are the owner and person who uses the tangible personal property .
So you're the person at the end of the day who's using the paint and so therefore , you owe sales tax on that . That's why Sharon Williams is charging you for sales tax when you go in and buy the paint .
However , if you look at time and material contracts , what you're doing is you're separating your time for your skill , your labor and services of installing paint , and that's essentially how the government looks at it is .
You're an installer of the paint and the paint is the product that you are selling , but the real thing is you are a service provider of that installation .
And so when you begin to separate your invoices and your contracts into time and material , in certain states like California and Texas you can file for a resale certificate which allows you to go to places like Sharon Williams . Hand this resale certificate and you won't pay tax on the paint and on your invoice .
You'll be able to separate that material and charge your customer for that paint . And now that becomes a separate item . Even if services are not taxable , the tangible personal property of the paint is , and that would allow you to pass that cost on to the client . All things staying the same . Your pricing stays the same .
All of that Now you've actually saved on the sales tax that you were paying earlier and now passing it on to your customer who is going to pay that . So that's one advantage of those states that allow those resale certificates .
¶ Understanding Sales Tax and Reseller Certificates
But the other one , the really caveat to note here , is that this is only something that you would put into a client's home . So make sure you're not giving it to Home Depot or any other stores for paint brushes or those sort of things , unless it really is something that you were basically selling to them .
But basically paint brushes would be considered something you would use , whereas the paint is something that they are using up in their home , and so , basically , you're just becoming a Sharon Williams to them , and that is even if you mark up the price of the paint . It's just whatever you sell the paint for Nice .
So this is huge because basically you're saying in certain states , like examples being California and Texas , if you separate out your service from your paint and you've set up that reseller , you get that reseller certificate from your state . You don't have to pay tax on the paint that you buy , but then you charge the customer that tax Effectively .
You don't pay tax but you collect it from your customer and that can save you because in California the sales tax is around 9% or so . So you're basically saving 9% of your materials is the savings to you because you don't change your prices , you leave your prices the same .
I mean , I guess you could pass the savings onto your customer , but if you want to actually save money , that's 9% of your materials . And if you're doing a million dollars in revenue a year and your paint materials is around 15% of your costs , so that's like $150,000 . And so when you realize a 10% savings on $150,000 , you're saving $15,000 a year .
That's just going straight in your pocket . Basically , yep , all for just adding one item to your invoice at the end of the day , right ?
Yeah , that's awesome .
So that one . So if you live in California or Texas or just check your local state laws , you might be able to incorporate that and put an extra tens of thousands of dollars in your pocket per year , depending on how much volume you're doing . All right , that's awesome . All right , so I'm going to go ahead and put that in the description .
All right , so let's say someone whoever's listening right now they're like oh , I'm either starting out my business or I'm about to do some work in Washington , or I want to look into this reseller thing . How do folks get started with sales tax ?
Yeah . So I think the first thing is always to go to your state's basically comptroller's website for this . Every single state has some kind of guidance when it comes to sales and use tax . It's such a complicated topic . Many states even have guidance for contractors in particular . Some may have it all the way down to the painter level .
At the end of the day , they will give you some brief guidance on it . They're not going to give you those tax saving strategies . They will give you some quick guidance on it what to do , how to file . So at the end of the day , you need a sales tax ID .
If you're doing , or have already have one in California , it's a seller's permit , but you'll have to kind of file with the government for those things and get your systems set up .
Quickbooks is a good example with the software that can track your sales tax , and so you want to be able to go in and make sure that you are not only collecting it but tracking it properly , because once you collect it , it becomes a really big issue .
If you do not pay it , the state will come after you and they consider that their money and it is their money , and so if you do not remit it on time . That is a big issue , but ultimately , go to your state's website . They have a lot of guidance and at the end of the day , there are specialists out there that do this from a consulting perspective .
But also you can just call the state . You can even write them letters . They will respond to your specific situation and a lot of times they encourage that to write them directly , ask them very specific questions and they'll give you guidance for your specific business . So that's another option as well .
Yeah , and if anybody is listening , that's had experience with calling the IRS and trying to get a hold of them . It's terrible . If you ever have to do that , try any other means . But this is completely different when you call your state .
There usually there's as long as you don't call during lunchtime and some will pick up and you can talk to somebody pretty easily . So calling your state is actually a lot easier than trying to call a federal agency , so especially the IRS . So that is definitely some good advice .
If you're not sure just you can't figure it out on the website just call and someone will probably be able to walk you through it over the phone . And then you mentioned QuickBooks Online . That's a great way to track how much you owe in QuickBooks Online .
But okay , if you're tracking it in QuickBooks Online , you get it set up correctly , so you know how much you're going to have to pay in sales tax each period that it's owed . What's usually the way to pay it ? What do folks have to do for that ?
Yeah , so most states have a quarterly filing . Some states will give you literal coupons paper coupons . You can file it that way . Almost all states have the ability to file on their website . So once you're registered you basically have an online profile . You can go in and pay it directly that way .
But basically once a quarter you're going to have to go in and fill out a form . You'll have all the information from your accounting system or at least you should with a good accounting system and you'll kind of just go through and say here's the sales tax collected .
They'll ask you how much you collected in different counties perhaps , and so all of the systems , when they're set up right , should track all this , make it really easy .
That form is super simple to fill out at that point , and then you submit payment , whether that's in a check format or drawing directly from your bank , and so all the states are different , but basically you pay directly to the state and then they are the ones who are remit to the individual counties within the state .
¶ Sales Tax and Success Stories
Awesome . Well , I'd love to hear your thoughts on this topic . If you're listening out there . If you have any questions about sales tax , feel free to go to Facebook and type in Grow your Painting Business and join our private Facebook group and join the conversation . What has your experience been with sales tax ?
Maybe you've done the , you've got a reseller permit and you've implemented that and your business love to hear about what kind of success you've seen doing that and what savings you've seen . And with that , I'd like to sign off here and we will see you next week .