Tuesday, February 25, 2014

The Tax Man Cometh!


I’ve been having a little issue with regards to misnomers about sales taxes and tax exempt numbers that has been bothering me.  When I’m working at a show there is rarely enough time to explain to shoppers who may be misusing their state tax exempt number why this is not only illegal, but also harmful to their state.
Plus, who wants to hear a vendor lecture you when you’re just trying to buy some beads? 

But, I feel the time has come where I need to speak my mind because I truly think that most people don’t fully understand the concept of a tax exempt number.  And my own personal experiences with the State Board of Equalization (BOE) over these past 30+ years hasn’t done much to help me learn about them either.  I had to do research and speak with numerous BOE employees, CPA’s and assorted tax gurus to gather my facts.
As a business owner I feel it is my responsibility to educate myself on how taxes are to be collected, repaid and dispersed.

Let me start by pointing out a few key points:

A tax exempt number does not automatically qualify you to purchase “wholesale”.   “Wholesale” in its true meaning is that you are purchasing in a larger quantity to then break down into a smaller quantity for resale.  The wholesale pricing structure is to allow for each handler to make a profit during the sale. 

A vendor may opt to give you a discount along with not charging you tax when you present your tax exempt number but they are not obligated to do so. 
They are also not obligated to accept the use of your tax exempt number.  A seller, at their own discretion, may opt to charge you tax regardless of your exempt status. 
They may also set a dollar amount you are required to reach before they will accept the use of your tax exempt number.  Keep in mind there is additional paperwork that needs to be kept track of and filed for a tax exempt sale, so the extra work for the seller deserves a sale in a dollar amount that justifies that.
When you’re at a show and the vendor is not charging you tax regardless of your tax exempt status they are breaking the law and depriving your local economy of much needed funds. 

A tax exempt number is issued by your states BOE and when you signed the agreement with them you agreed that if you did not pay tax on your purchase of goods that you would then either collect sales tax when you resold the goods, or the item created from the goods, or you would in turn also collect a tax exempt number.  Eventually at some point down the line the sales of goods needs to have taxes applied to it. 
The purpose of the above is to avoid double taxation on a commodity, however, many times I hear people make comments that lead me to believe that they think the number just excludes them from having to pay sales tax.  That would certainly make us pretty special if we just got a little number that said we no longer had to abide by the law.

I also witness, on more occasions than I care to admit, people “sharing” their tax exempt number with their friends.  Now don’t get me wrong….it is your prerogative if you’d like to break the law, but as a seller I have also agreed when I accepted possession of my tax exempt number from the BOE to conduct business that I would willing report any fraudulent usage I may encounter of another tax exempt number holder to the BOE.  In other words, if I know you are committing fraud, I am supposed to turn you in!

It is one thing if you are a designer and you bring “buyers” to a show with you and they are shopping for your company.  But if your friend just wants to avoid paying tax?  That’s illegal and is subject to massive penalties, fines, interest and also qualifies for jail time.  If you are ever audited (horrid ordeal with this government office!) they will require you show proof of every single one of those purchases and if you cannot it is a horrible outcome.  They can seize your cashbox, register or whatever other item you may have been using to conduct business.  They can lock and bolt the doors to your business.  Put a lien on anything of value you may own including taking your home.  And yes, sadly, I have witnessed just that take place with someone very close to me.

What are those sale tax dollars for anyway?  Well, they are used by each state in varying degrees for things like maintaining your roadways, improving your schools and the level of education given at said schools, providing for government agencies such as your local police, fire and emergency response services plus much more.  You can find out how your local sales tax dollars are used in your city, county and state by contacting them or googling for the information.

So really do any of us have a right to try and avoid paying taxes to help support those systems? 
I agree there should not be double taxation on an item, but if you are using your tax exempt number and then making your girlfriend a pair of earrings, by law you are supposed to declare that percentage of your sale on your tax forms when you file them and pay the appropriately due taxes at that time if you did not pay them at the time of purchase.
Or if you do sell the wares you have made from your tax exempt purchases you are required to collect the appropriate sales taxes at the location where you are making the sale, or you also need to collect and keep a copy of that persons tax exempt number.

Tax exempt numbers in many cases do not apply to goods such as tools, books or kits.  The reason being is that you will not be reselling these items but will be using them yourself.  If the vendor did not charge you tax on them during the time of purchase you are legally obligated to declare them when you file your sales tax.

Just as there is a line available on your sales tax form for declaring product you purchased and did not originally pay tax on but have used for personal means, there is also a line if you paid tax on the goods and then resold them.  You are eligible to have that amount of tax refunded back to you.

Finally, it should be understood that sales tax amounts (or the percentage of the total sale of the goods) is based on the location where the sale took place.  So regardless if you are from another country or from a state that does have sales tax, if you are standing in a city, county, state, country that does collect sales tax you are required to pay that amount.  You are not exempt just because your state doesn’t collect them.  You know the saying, “When in Rome”?  It applies in this instance.

I think I’ve covered some of the major points that have been irking me.  And let me clarify that they don’t just irk me because I am a business owner.  I agreed when I went into business to deal with the mounds of paperwork…it comes with the job.  You should know that the part that irks me the most is people’s neglect and willingness to pay taxes for meaningful needs.  You don’t get to complain about the lack of education your state offers if you are one of those people who aren’t properly paying your sales tax.  You don’t get to complain about the potholes in your roads, or how the divider lines are so worn out you can barely see which lane you’re supposed to be in.  You don’t get to complain that there is never a police officer around when you see someone driving like an idiot or texting in their car and risking lives.  You don’t get to complain that there are not enough mental health facilities available to help deal with the ever growing population of homeless people on our streets.  You don’t get to complain about any of the services that your sales tax dollars would pay for if you are one of the peeps I’ve described above.  

Edit Addition - As my BFF and one of my biggest competitors Betcey pointed out in the comments, tax exempt/resale numbers are industry specific.  When you applied for the number you had to tell them what you would be buying/selling.  This in turn means that just because you have a number that allows you purchase beads/jewelry supplies at a tax exempt status, it does not give you the right to purchase landscaping supplies, cosmetics, cars, etc.  So if you present a tax exempt number for Joe's Plumbing Service to buy beads you are also breaking the law. 
If they weren't industry specific we'd all be able to walk onto any car lot and buy a car sans sales taxes.  But you better believe the car dealership is not going to risk their business by allowing you to do that.  Sadly, because most of our out of state numbers are presented at trade shows, we have no way of really knowing if you're using the correctly issued number or not.  It falls on you to be honest about it.  And it will fall heavily on you should the BOE audit you.

My intent with this post was not to tick people off but to hopefully share a little of what I’ve learned in regards to tax exempt numbers.  I don’t have all the answers, but I do know that none of us like the thought of having to pay taxes of any kind…but I think we would like our world much less if we had no schools, no police, no fire departments, no laws, right?

Let’s all help each other out by being socially responsible tax payers and do the right thing!

With respect,


Betcey Ventrella said...

Brava, Beki!!! Well-stated.
I'm always amazed at how little most people are aware of regarding their resale / tax-exempt numbers at the shows. Thanks for maikng it clear!

Betcey Ventrella said...

Brava, Beki! Well-stated.

I'm always amazed at how many people don't understand how their resale / tax-exempt numbers work.

Only thing you left out is addressing the people who have resale numbers for hardware stores or computer consulting or ... any business that has absolutely nothing to do with the bead or jewelry business.

Lois Venarchick said...

Right on! I have tried explaining this to people especially in my shop but then I just groan with aggravation because people do not get it or want to get it. States who feel they are losing out on revenue, and many are, should figure out a way to police their resellers permits. I get kind of tired being their tax collector and enforcer all in one. Many people here in Washington state, dropped their reseller permits when they found out last year, that the state would be coming after them for " usage taxes ". That is if you bought it and didn't pay sales tax on it, the state wants an accounting of it and the appropriate taxes. In the end, this sales tax revenue helps all of us for the greater good. Oh and I think we should charge sales taxes on all internet sales, unless a valid resellers permit is available.

Carol Dean Sharpe said...

Excellent post, Beki! The more beady peeps are educated about these things, the better. Thank you!

SaraBeth said...

What happens to you, the vendor, if you are taking sales tax exempt numbers fraudulently? What if you are audited? What happens then?

I would think that if people really care about their vendors they would think twice about exposing them to some sort of dire consequence.

Sylvia said...

Beki this needed to be said, and I am glad you said it so completely and perfectly.


Beki said...

The vendor accepting an invalid or incorrectly used tax exempt number is also liable for fines and penalties, SaraBeth, if they accept this number knowing it is no longer valid or has been issued to someone in a different industry. However, many numbers either have no expiration date, or never expire (issues the states need to deal with) or many times the industry is designated by the number or letters within the number and a vendor at a show, for instance, would have no way of knowing what each states designation is. So rather than penalizing the vendors (in most cases) the states will audit the number holder instead.

In my store it is much easier for me to monitor these things. I can look up the validity online, check for expiration and refuse numbers outside of the industry I sell within because I know what California numbers are.

Now, this is not to say that businesses who get audited are not also subject to being penalized for accepting invalid numbers themselves. Once an audit begins they can ding you for every single little thing they can find. And trust me when I say they will dig until they find something.

I have watched people lose their homes, cars, banks accounts and businesses during a BOE audit. They are one of the most tenacious government offices and I personally would never knowingly tangle with them for any reason!

But, when I'm vending at a show, I cannot question the buyer whether their jewelry sales business is named Joe's Plumbing or not. It is just not feasible. Not to mention the uproar that generally takes place if you question anyone at the register about the validity of their number. I cannot tell you how many times I've had people storm away because I have a $25 minimum (tiny in comparison) to even accept a tax exempt sale.

Judith said...

Well and succinctly put Beki. I applaud how you stated the facts and consequences.

connieJ said...

Beki, thank you, thank you!! I started laughing when I read the part about accepting a number issued to a plumber because I have actually had a customer like this in Tucson. I think the one that irks me the most is when some of the good people of Oregon refuse to pay the tax in other states because they don't have a state sales tax. Let's not forget the lovely Canadians who think they should not pay because they live outside of the country. You covered that point quite well.

Nchantme said...

Awesome article, Beki! I would like to share it on my blog.

Bead Prestige said...

Perect timing Beki. I just had this happen to me at an Art show where a customer bought 1 retail item and claimed they had a store and tax Id number, but the purchase was simply to satisfy his wifes interest in a finished piece of jewelry. Lesson learned is to ask a few certain questions, and/or get tax Id number. And set my own requirements to allow tax exempt. This article helps me qreatly to better understand what I observed selling to someone trying to avoid paying sales tax, just because they r at an Art show. My instinct was right. Thank you for sharing.