Fine Points of Sales Tax
Do you need to charge sales tax when you sell something to a business that they use in producing their goods? The answer varies from state to state. January 13, 2009
Question
I occasionally build concrete molds for a nearby company. I buy the material and pay the sales tax. Do I need to charge that company tax? My thinking is no, since I paid the tax for the material, and when this company sells the end product of concrete, the purchaser will be paying sales tax for the item. All I should need is his resale number. Is this correct?
Forum Responses
(Business and Management Forum)
From contributor T:
I may be wrong, but sales tax is only paid by the end user. So unless the form is given to the customer, the concrete shop should pay the tax. You should be tax exempt when purchasing the raw materials, charge tax on material and labor, and report as required.
From contributor J:
State laws vary, but - materials that become part of a product manufactured for resale are exempt from sales tax. So the answer is that you shouldn't be paying sales tax on the material. It's up to your customer to decide if his purchase is taxable. If it is, then collect the tax. If it's not, then...
"All I should need is his resale number. Is this correct?" No. You need a properly executed resale or exemption form. Without it, collect the tax and pay it to the state. If he refuses to pay the tax and refuses to provide the above mentioned form, then stop selling to and report the customer to the state.
From contributor D:
The forms you make are "tangible goods" that he is not reselling. He is the end user - he makes concrete things out of them - he does not resell the forms themselves. So he is liable for sales tax on the item (just like if he was buying those concrete forms from Home Depot or Target). So you need to either charge him sales tax, or get him to fill out whatever exemption/resale form your state requires to allow sales of items without sales tax - if you don't get that and you're audited, you are the one who's liable for the tax.
From contributor R:
If you are selling, then he will have to pay sales tax. You should be able to get the tax back that you paid on material.
From contributor S:
He wrote "I occasionally build concrete molds for a nearby company." If he was making "concrete things out of them," then he's making them (molds) for himself, not, as he wrote, "for a nearby company." He really wasn't clear by what he wrote.
From contributor N:
In my neck of the woods (Indiana), tools, equipment, and fixtures used directly in the manufacturing of a product for resale are exempt from sales tax. The items you are making for this company may fall into this category.
In this case, they would not pay sales tax, and you shouldn't pay sales tax on the materials either. Of course you need to have the proper exemption forms from your customer. This puts the burden on your customer to properly represent the items being purchased.
The sales tax should always be collected from the end user because all of the value has been accounted for at this point, and the amount of tax collected is maximized. If you want to purchase your material tax exempt, you need to have an account with the proper taxing authority to do so.
This will allow you to purchase tax exempt for qualifying purchases, as well as collect sales tax from your non exempt sales.
From contributor D:
My take was that he builds forms for a company that uses the forms to make concrete items. (Garden ornaments? Building materials? The specifics don't matter so much.) These items are then sold to customers, separately from the molds. In Illinois, those molds would be subject to sales tax for the guy who uses them to make the final concrete product (their customer, in turn, owes tax on the concrete product he made with those molds). It appears in Indiana they are not. How do I get that law passed in Illinois? (Fat chance with our politicians!)
From contributor B:
I understand that if you paid tax on something, you cannot double tax the buyer, which is what you would be doing if you charged them tax. If you are not exempt, you should lump sum all costs in price. They will be paying the tax by paying you back.
From contributor D:
In Illinois, there are times when that is true - the total cost of materials used has to be under a certain percentage of total price, but there are restrictions. (If you are remodeling an existing house, for example, you can do that - if you are building new kitchen cabinets for that existing house, you cannot do that).
From my understanding, I am eligible to be exempt from taxes on materials I purchase that are going to be incorporated into the final tangible end product (I don't have to pay tax on the plywood that goes into the cabinet, but I have to pay tax on the sandpaper, as well as the orbital sander).
If I don't pay tax on the sandpaper or sander to whomever I buy it from, I then am required to pay tax on it to the State of Illinois directly myself (there's a special place on our sales tax form just for those instances).
But if I end up paying sales tax on the plywood, for example, I am still required to charge sales tax on the total price of the cabinet. The state's argument is that the customer is not buying plywood from me, he's buying a cabinet - so the cabinet is taxable. What I pay for the plywood is essentially irrelevant.
From contributor Y:
I have been in a similar situation as the questioner. I bought the materials and paid tax on those materials. The other company reimbursed me for the materials, and I just charged them labor for the products. I didn't tax them for the product. So was I wrong?
From contributor D:
When I was setting up our business a few years back, I looked on the website of the IL Dept of Revenue. They had the regulations along with examples that were easily applied to our business. The basic concept is that if you are creating a "tangible good" (a cabinet for example) that tangible good is fully taxable (not just the labor portion). If you are altering a customer's existing tangible good (painting or refinishing, for example), then you can charge tax on materials but not labor.
But I recall someone on WOODWEB saying their state required sales tax be charged on stock cabinets, but not custom. Every state can be different, and can interpret the same thing different ways. I would contact whichever agency governs it in your state (check their website first) and see what they say. Because the first defense in government is "ignorance of the law is no excuse" - even if the government is the one who made knowing about the law difficult.
From contributor K:
In some states there is no sales tax on immovable objects. When you build and install cabinets that become part of the house, it becomes an immovable.
If you are paying tax on materials and then charging tax on the final product, then you are entitled to keep the amount of tax that you paid on the material when payment is made to the state. There is a line item for this on all of the state forms that I have seen. I tried the tax exempt thing but it is a pain when you are buying goods from multiple sources (like Lowes, Home Depot) where sometimes you pay tax and sometimes not. We now just pay the tax on material and take the credit on the tail end.
