Question: Small Business Sales and Use Tax

[Christopher Green]

keseko2000@yahoo.com (keseko) wrote in message news:<49c39d61.0308041614.30985bf7@posting.google. com>...

Hi, I'm in the process of establishing a small [home] business. I am a little bit confused about "sales and use tax," and the folks at the California State Board of Equalization seem just as confused. I cannot get a straight answer via phone! Hopefully some knowledgeable person here would answer correctly.

Try the BOE Web site. If you can't understand the articles on that
site, figure on acquiring professional assistance to get your business
going legally.

California law states that a person must obtain a seller's permit (which you use to report sales and use tax to the IRS) if the business sells tangible property that would ordinarily be subject to sales tax if sold at retail.

No, you report sales and use tax to the BOE. And you're right: if
you're selling goods, you pay sales tax on those goods, which you can
charge to your customers. If you ship out-of-state, though, those
sales are not subject to sales tax (your customers owe use tax in
their state, but that's not your responsibility).

I plan to sell custom computers.... My problem with this is that tax for the parts--which is essentially the computer itself--has already been paid for, at least in my case. Having to charge an extra 8.25% to my customers in addition to a large shipping and handling charge would ruin my business. Not to mention having to file extra IRS forms, and hell, the State would be paid twice: one by me (from buying the parts), and one by my customers.

That's exactly right. Because you are using those parts to construct
something new, you pay sales tax on the parts, and you charge sales
tax to your customers for the custom computers you construct.

If you were simply buying the parts for resale, you would tell your
vendor that they are for resale, give your permit number, and avoid
paying sales tax. But you are not simply reselling the parts, so the
state gets sales tax on both transactions.

Does anyone know how a small [home] business can get away from the ridiculous tangible "sales and use tax" law?

Every business that does fabrication or assembly has to deal with it.

P.S. I have a general question. Say I get into business and I miss one or two "required" things. Would I be fined by the IRS, sent to jail, or what? If they catch one or two missed things (like sales tax, or other certificates, licenses, etc.) do they give a chance to correct it? Or is it one-strike-your-out policy?

Usually they charge you a substantial penalty. These things are not
optional, and if you are having difficulty organizing them all, you
would do well to engage an accountant who knows this line of business,
sooner rather than later.

As far as I know, all I need to establish a business as an individual in California is a business name certificate from the county. With the temporary exception of the Sales and Use Tax, I would then have to report/pay State and Federal Income Tax, in addition to Self Employment Tax. That' it, right?

You also need a business license from your city or county, and this
may be the hardest part. It may require home-based business approval
or zoning approval. Many cities are reluctant to permit any kind of
manufacturing in a home-based business, so make sure you have business
license issues straightened out. And if you're selling tangible goods,
there is no "temporary exception" for that sales and use tax permit.

As a sole prop. with no employees, your taxes are probably limited to
Federal and California income tax, self-employment tax, sales and use
tax, business property tax (contact your county assessor for details),
and local taxes such as business license fees (contact City Hall).

--
Not a lawyer,

Chris Green

[Christopher Green]

cj.green@worldnet.att.net (Christopher Green) wrote in message news:<c31fa7b1.0308042225.20db2827@posting.google. com>...

keseko2000@yahoo.com (keseko) wrote in message news:<49c39d61.0308041614.30985bf7@posting.google. com>...

[snip]

I plan to sell custom computers.... My problem with this is that tax for the parts--which is essentially the computer itself--has already been paid for, at least in my case. Having to charge an extra 8.25% to my customers in addition to a large shipping and handling charge would ruin my business. Not to mention having to file extra IRS forms, and hell, the State would be paid twice: one by me (from buying the parts), and one by my customers. That's exactly right. Because you are using those parts to construct something new, you pay sales tax on the parts, and you charge sales tax to your customers for the custom computers you construct. If you were simply buying the parts for resale, you would tell your vendor that they are for resale, give your permit number, and avoid paying sales tax. But you are not simply reselling the parts, so the state gets sales tax on both transactions.

My mistake, see BOE Regulation 1525(b), interpreting R&T Code 6007.
Purchases of goods to be incorporated into a finished product are
exempt. Your resale permit allows you to buy your components without
paying sales tax. You will need to be prepared to account for their
use on your business's sales and use tax return and in audits.

--
Not a lawyer,

Chris Green

[Timothy Horrigan]

>That's exactly right. Because you are using those parts to construct

something new, you pay sales tax on the parts, and you charge salestax to your customers for the custom computers you construct.

This might not be a good time to make a general point about "double taxation."


Double taxation is NOT illegal. It's not even necessarily unfair. Lots of
things are taxed multiple times.

I am surprised that computer components bought by a computer manufacturer are
being sales-taxed twice. But I don't think it's unfair. The state of
California basically skims 8.25% (or whatever) off retail sales. This sounds
like extortion to some people, but in fact the retail markets rely on the state
government for all sorts of necessities (e.g., a court system to settle
disputes, a criminal justice system to handle crimes, etc.) One could argue
that the components passed through the retail market twice, once as parts and
once as parts of an assembled machine--- and hence the state is entitled to two
sales taxes.


*****
Tim Horrigan <horrigan@aol.com>
*****