Avoiding Double Taxation: Passing Vendor Sales Tax on to Clients the Right Way

As an interior designer, you sell goods to your clients, which basically means that you are a retailer and need to charge your clients sales tax and then pay that tax to the state that you collected for. To do this, you purchase goods wholesale and provide your vendors with a copy of your resale certificate so they don’t charge you sales tax. However, there are times when your vendor won’t accept your resale certificate. A few examples: when shipping to a state where you don’t have a resale certificate, when purchasing retail and they don’t sell to retailers, or when you’re just in a rush to buy something and don’t have a copy of your resale certificate available.

What Are Your Options?

1.     Provide the vendor a copy of your resale certificate and request they remove the tax (or refund it if you already paid it). Many states require this, so it’s your only option.

2.     If the goods are shipping to a temporary location like a fabricator, you can usually provide your vendor with a Final Destination Form—something you sign telling the vendor where the final destination will be so they will remove the tax (as long as the final destination is a state where you have a valid resale certificate).

3.     Pay the tax and pass it on to your client. This is the point of this article. 

How to Enter the Item in Studio Designer:

1. Enter the Purchase Cost in the Unit Cost field

2. Enter the tax you paid into the Sales Tax 1 field below Purchase Cost

3. Enter the Selling Cost as you normally would

4. Taxable should be set to YES

   
   

*Note that the tax you paid should be less than the tax charged to your client. This is because the client must also pay the tax on your markup.

Filing your Sales Tax Return

1. Print the sales tax report as you normally would. We recommend the Sales Tax by GL Invoice report which will have a column showing Prepaid Tax as well as a line item for each invoice where sales tax is entered into the Sales Tax 1 field under Purchase Cost for an item.

2. Most states (not all) allow you to take a credit for the amount of sales tax that you paid to a vendor. If your state allows this, you will either reduce the amount of taxable sales by the amount of the goods that you paid tax on when entering the Taxable Sales or enter the amount separately as a deduction or exemption which will reduce the total Taxable Sales.

   
   

IMPORTANT NOTES

• You can only deduct the amount you already paid tax on when the tax charged to you is for the same state where you are selling the goods. For example, if the vendor charges you CA sales tax and you are charging your client CA sales tax, you can deduct the amount of CA goods that you already paid tax on. However, if your vendor charged you CA tax and you are charging your client TX tax, the CA tax should be passed straight to the client as part of the cost of the goods. Most states will not allow you to deduct goods that were taxed in another state.

• If you enter tax under Purchase Cost, but change Taxable to NO in the item under Selling Cost, you will end up paying the tax to the vendor, but not charging it to your client.

• Some states do not allow you to deduct the cost of tax paid goods from the amount you charged your clients, so always try to get your vendor to remove or refund any tax they charged you on goods that you will resell.

  
  

Conclusion: Sales Tax Can Be COMPLICATED.

It’s imperative that you work with an interior design bookkeeping professional experienced with sales tax compliance in any state where you will be selling goods. We have overwhelmingly found that even though goods are being invoiced regularly and sales tax reports printed from Studio Designer are used to prepare the returns, it’s still common for inexperienced sales tax filers to overpay their sales tax and under charge their clients.