Are you paying too much sales tax?
Whoa, Randy, everyone knows that sales tax collected has to be remitted to the state – how could I ever pay too much?
Did you know that when you report and remit sales taxes collected to the state, you are allowed to deduct certain amounts paid by you for sales taxes on the materials used in your product? Now hopefully, you’re already using an exemption certificate that means you don’t pay sales tax on most if not all of your purchases. For the occasional purchase made from a vendor that doesn’t accept your certificate, or perhaps made online, these can and should be deducted when you do your excise tax reporting.
What is Tax paid at source?
Washington State defines “Taxable amount for tax paid at source” as the “Amount on which sales tax was previously paid on goods purchased for resale without intervening use.” Your deduction is based on the amount paid for the materials, not including the sales tax. It’s important to note that sales tax must be collected on the total price of the item or contract when the materials are resold. The deduction is allowed for items that are resold, which for many businesses may be interpreted to mean that the item is used in your product. This is different from the products you might use to produce, package or market your products.
Example: if a painter were to pay sales tax on paint or primer, that would be deductible. Tax paid on brushes, tape or plastic would not be, as these items are not resold without intervening use.
How do I deduct the tax paid at source on my return?
You first need to know which city, or jurisdiction, your tax was paid in. If you’re buying from the home improvement store in Kent, you’d know it’s Kent to report in, but keep in mind that just as for the tax you collect there may be more than one rate for the city you’re in. If you paid 9.5% in King County, you’re in an RTA jurisdiction, so make sure you report that on your excise tax filing. Perhaps it was a non-RTA jurisdiction you bought the product in, even if you resold it in an RTA zone. Where you bought it – and paid the tax – is the determining factor in how much you can deduct.
When you go to do your efile on the DOR website, you’ll enter your gross sales, then click the “Deductions” button, select “Taxable amount for tax paid at source” and enter the amount of tax paid for each jurisdiction. You may have just one locale you paid tax in or you may have several. You may have even bought stuff in a city where you collected no sales tax from your customers, resulting in a negative tax due for that city. The website will warn you when you do the error check that you have this happening, but if you double check your data and see that this is the actual fact pattern, it’s okay to report it that way.
How do I know I’ve reported my sales tax accurately?
This is a subject suitable for a separate discussion, but if you calculate on the side what your tax collected was, and then deduct the actual tax paid at source (in excel, for example), you should get the same amount that the state is saying you owe. When I do the reporting for a client, I have an excel template I use that makes sure it reconciles before submitting the report. Confirming the proper amount can be especially tricky if you are a project based business and don’t necessarily collect all the money from your customers at the time of service or all in one payment.
For more information, see the state’s flyer on Taxable amount for tax paid at source at https://dor.wa.gov/sites/default/files/legacy/Docs/Pubs/ExciseTax/FilTaxReturn/TaxPaidAtSource.pdf
Helping clients make sure they don’t pay more in taxes to the state or the feds is just one of the benefits of working with a CPA like me. There are many other ways that companies bleed money without realizing there is an alternative or that it’s even happening, and working with a CPA is one of the best ways to get that experienced eye to identify more opportunities to hang onto your hard earned revenues.
If you want help with your sales tax reporting, please give us a call at 253-234-5732. If you haven’t been deducting sales taxes you’ve paid on your raw materials, the amounts you save will likely be far greater than the cost of getting professional help with the computation and reporting. Our office in Kent serves Renton, Des Moines, Tukwila, Federal Way, Burien, and the Seattle area.