We constantly receive questions from all of our new QFloors clients, as well as a large number of existing clients, about sales tax applications in their state or Canadian province. (By the way, Canadian companies can set up our sales tax system to properly charge or accrue GST, PST and HST.) Many of our clients are not administering and/or reporting sales and use tax properly according to the laws of their state. Some continue to do it the way they have always done it. “That is the way we were taught to do it 20 years ago and we’re not changing,” they say.Fortunately, most customers, even those who might have inadvertently been doing it wrong in the past, take our advice to verify the proper application of sales tax with a qualified tax attorney. But however you choose to administer sales tax in your business, we will help you set it up the way that you want it.
I would recommend that you review your state’s tax laws. Many of them have changed in the last 5 years because of the South Dakota v. Wayfair decision. As it stands today, 5 states have no sales tax at all and 6 states require sales tax only and no use tax. That means that 39 states require use tax be administered to at least some of your floor covering sales. Many of you may be thinking, “Sales tax I know, but what is use tax?”
Let me start by describing the different types of sales that may have different tax implications in your state:
- Material Only (Cash & Carry): As you all know, when you sell material out the door with no installation component, you are engaging in a retail sale and every state (except the 5 no tax states) requires you to charge sales tax to your customer and remit that whole amount back to the state.
- Installed Sales: Most of the jobs we do fall into this category. If you are in one of the 6 states that have only sales tax laws, you will still be charging your customer sales tax – either on the material only, or on the whole invoice including installation charges, depending on the state and the type of sale. If you are in one of the 39 states that have use tax laws, you won’t be charging your customer sales tax but you will be paying a ‘use tax’ to the state.
So let’s take a step back and define use tax. Use tax is simply a sales tax on you(r)–the dealer’s– cost of materials. Some of you pay this tax to your product vendors when you buy products. Indeed, many states encourage/require you to pay your use tax in this manner. The rest of you purchase your materials tax exempt from your vendor and accrue and pay a ‘use tax’ when those materials are used on installed jobs.
You may be wondering, “As a retailer, why would I be subject to use tax? Shouldn’t I be charging sales tax to my customer on everything I sell?” The reality is you are both a retailer and a contractor. You are a retailer when you sell material only (cash & carry sales), but you are a contractor when you agree to install the material for your customer. When you permanently attach (install) the floor (through employee or subcontractor installers, it doesn’t matter) for a customer, you are deemed the ‘end user’ of that tangible personal property. As the end user of the product you must pay sales tax on the wholesale cost of the product (aka use tax), not sales tax on your customer’s price.
If you have arranged for your vendors to charge you tax, they will remit the tax they collected from you. Does that mean you don’t have to report or pay any more tax to the state? No, you still have to send a sales tax report to your state, and you will also report and pay tax on a portion of your material only sales. Remember, you still charge your cash and carry customers a sales tax on their retail price, which is higher than your wholesale cost that you have already paid tax on. So, you just have to pay tax on the difference between your wholesale cost and retail price on cash and carry sales. And yes, our QFloors sales tax report gives you these totals to fill out the state form properly.
Special Situations:
- Different Flooring Materials - Most use tax states treat all flooring materials that are attached to the floor (installed) as a use taxable material. But some states have determined that products like, for example, tack and pad carpet installs can be easily removed and taken out of a structure and reused somewhere else and therefore not permanently attached and therefore not a material subject to use tax, but instead must be charged and remitted as a retail product. Go figure.
- Different Job Types - Some use tax states require sales tax to be charged on Commercial Jobs or New Construction jobs, etc.
- Reporting Requirements by Installation Location - Many states require contracting businesses that install (use) products outside of their city, to report sales and/or cost of materials used in the destination location, city by city. QFloors has a Sales Tax Rate Table to type/import each city in QFloors. These different rates will apply by city as the city is selected on the sales order screen.
- Reporting Requirements for Different States - If you do installations in multiple states, you should be filing sales tax reports in each of those states. Also, it is very important that you be exempt from tax with your vendors so that they don’t charge and remit tax to your home state. Because you have to report installed sales and pay a full use tax to other states.
In some of these situations, you will need to set up multiple tax strategies in our Sales Tax Setup screen. Have our support department help in these instances.
No matter how your business administers sales and/or use tax, QFloors can dramatically reduce the time and work required, and help ensure you are not paying too much or too early.
