How to Make Sure Your Business Isn't Paying Too Much in Sales Tax
Dean Cycon was having an after-work beer with one of his suppliers and complaining about the high price of propane, which powers Dean's Beans Organic Coffee Company, his fair-trade wholesale and retail coffee company in Orange, Mass. The supplier, seeking a silver lining, said, "Well, at least you don't have to pay sales tax on it, because it's used in your manufacturing," Cycon recalls.
When he returned to his office, Cycon found that he had, in fact, been paying sales tax on propane--along with various other supplies used in creating his products.
Sales tax laws vary significantly from state to state, and even among various municipalities, says Gail Margolies Reid, a CPA and author of The Complete Idiot's Guide to Low-Cost Startups. In many areas, products and services purchased as part of a manufacturing or production process are not subject to sales tax. However, while Cycon was being charged sales tax erroneously, propane used in manufacturing may be taxable in other areas, she says. To protect yourself from paying extra sales tax, follow these steps:
Get an opinion. If the law is not clear about whether you'll owe sales tax, inquire with your state and, if applicable, municipal tax office, Reid says. Describe the situation in question and ask for an opinion on whether sales tax is due. Such an opinion can be an important factor in your favor if the issue is ever questioned. If you prefer to do so anonymously, have your accountant or attorney send the request.
Issue resale certificates. To obtain an exemption, you'll likely have to issue resale certificates to your suppliers to prove the product or service was purchased for resale and not subject to sales tax. These can be obtained from the taxation authority in your state or municipality, Reid says. Cycon found that some of his suppliers required their own versions as well.
Contact your suppliers. When Cycon contacted his propane supply company, they were aware of the issue and immediately credited his account for six months of sales tax. He is also eligible to petition the state to refund up to two years. He estimates that correcting erroneous sales tax billing will save his $4 million company about $5,000 per year.