Dreme Posted 13 Sep 2010 , 7:57pm
post #1 of

I had two clients this week look at me in shock when I told them I charge tax. They claimed that home bakeries are not supposed to be charging tax. Uhm, I assume the other home bakers that they have talked too aren't licensed for them to say they don't charge this.

Im just doing what I was told. I have only been in business for going on 8 mos now. I was told that I have to charge tax on goods I sell as well as pay use tax, etc. Am I missing something here? Aren't we supposed to be charging tax as licensed businesses.

42 replies
jason_kraft Posted 13 Sep 2010 , 8:11pm
post #2 of

Depends on the state. In CA you do not have to collect sales tax on prepared food as long as it will not be consumed at the retailer's location, so if your business does not have seating for customers you do not need to collect sales tax at all in CA.

Use tax only comes into play when you purchase something from another state and thus do not pay sales tax. You still owe use tax based on the tax rate where you live, but this is rarely enforced.

Dreme Posted 13 Sep 2010 , 8:15pm
post #3 of

I'm located in Raleigh, NC. Any others located here who do this?

myslady Posted 13 Sep 2010 , 8:23pm
post #4 of
Quote:
Originally Posted by Dreme

I had two clients this week look at me in shock when I told them I charge tax. They claimed that home bakeries are not supposed to be charging tax. Uhm, I assume the other home bakers that they have talked too aren't licensed for them to say they don't charge this.




I think that's a broad assumption. People will tell you what they want to tell you, that doesn't make it true.

Quote:
Originally Posted by Dreme

Im just doing what I was told. I have only been in business for going on 8 mos now. I was told that I have to charge tax on goods I sell as well as pay use tax, etc. Am I missing something here? Aren't we supposed to be charging tax as licensed businesses.




Where I'm at you do not have to collect sales tax if the product is consumed off site and the only time use tax applies is when sales tax was due but not collected by the vendor or seller. therefore a use tax of equal amount is due from the customer.

jason_kraft Posted 13 Sep 2010 , 8:24pm
post #5 of

According to NC DOR Section 19-2 D, it looks like bakery items sold without utensils (i.e. wedding cakes) are exempt from sales tax but are subject to 2% local and use tax.

http://www.dornc.com/practitioner/sales/bulletins/section19.pdf

this-mama-rocks Posted 13 Sep 2010 , 8:39pm
post #6 of

It depends on how you have set up your business.

If you consider yourself a "cake retailer" and charge sales tax on the final price of the cake:
* you do not have to pay use tax on things that go directly into the cake, like ingredients, food color, fondant, boards, etc.
* you do have to accure and pay the appropriate use tax on all things that are not a direct component of the sold cake, like equipment, printed marketing materials, or frosting bags.

If you consider yourself a "service provider" and do not charge sales tax on the final price of the cake:
* you have to accrue and pay the appropriate use tax on everything you purchase to conduct your business

Regardless of how you have set up your business, if you purchase anything taxable out-of-state, and the seller charges you sales tax for the state the seller is located, you have to accrue and pay the use tax based on where your business is located. You will need to attempt to get a credit from the seller for the other state's sales tax you were charged in error.

And, YES, this is enforced ALL THE TIME. I was a GA sales and use tax auditor for 8.5 years, then a multi-state sales and use tax consultant for 2 years. The likelihood of you getting audited may be small since you are home-based, but the auditors can be ruthless and take a sick glee in assessing someone a little tax and a lot of penalties and interest.

CakeInfatuation Posted 13 Sep 2010 , 8:58pm
post #7 of

No sales tax on food and candy in PA and apparently bakery items fall into that category. So thankfully, I don't have to charge sales tax!

jason_kraft Posted 13 Sep 2010 , 9:18pm
post #8 of
Quote:
Originally Posted by this-mama-rocks

And, YES, this is enforced ALL THE TIME. I was a GA sales and use tax auditor for 8.5 years, then a multi-state sales and use tax consultant for 2 years. The likelihood of you getting audited may be small since you are home-based, but the auditors can be ruthless and take a sick glee in assessing someone a little tax and a lot of penalties and interest.



In your experience, how closely do state auditors look for use tax violations? Do they actually go through individual receipts for business expenses and look for out-of-state vendors?

cakesbycathy Posted 13 Sep 2010 , 9:39pm
post #9 of

In OH we have to charge for delivery but not on the actual food product. You really should check into the laws for your state before charging or not charging sales tax again. thumbs_up.gif

this-mama-rocks Posted 13 Sep 2010 , 10:55pm
Quote:
Originally Posted by jasonkraft

Quote:
Originally Posted by this-mama-rocks

And, YES, this is enforced ALL THE TIME. I was a GA sales and use tax auditor for 8.5 years, then a multi-state sales and use tax consultant for 2 years. The likelihood of you getting audited may be small since you are home-based, but the auditors can be ruthless and take a sick glee in assessing someone a little tax and a lot of penalties and interest.


In your experience, how closely do state auditors look for use tax violations? Do they actually go through individual receipts for business expenses and look for out-of-state vendors?




Yes. A company might have said "oh, here's the report totals we use for filing purposes", but we always wanted to see the backup for the reports - and then we went through stacks and stacks (or boxes and boxes) of individual invoices.

this-mama-rocks Posted 13 Sep 2010 , 11:04pm

Even if your state does not require you to charge sales tax on the final product, rest assured you will be liable for the use tax on all purchases. A cash-strapped state government is NOT going to let the entire business model be exempt from the sales/use tax.

gingerbreadtogo Posted 13 Sep 2010 , 11:10pm

FYI.. In CA they are starting to tighten up on use tax. They audit a supplier and then they send notices to individual business to find out if they paid sales tax or if they legitimately are wholesale buyers. They claim they are going to clamp down on nonbusiness use tax..not sure how they can afford to do that.

costumeczar Posted 13 Sep 2010 , 11:15pm

In VA bakery/grocery store cakes are considered taxable at the prepared food rate, because it's a prepared food that's meant to be eaten off-premises, so I collect and report the 5% sales that that applies to that category of food. The raw ingredients category is only taxed at 4% (I think) so if I was selling that then I'd charge 4%. In the city of Richmond they have to charge 10% on catered food because that's a special rate that they put into place for restaurants, and they lump caterers into that category (or so I hear from the caterers I know from the city).

I do what This-Mama-Rocks says and I have the sales tax exemption card that lets me not pay sales tax when I buy ingredients, etc. I have to make sure that I'm only using the exemption on things that would go into the cake, not magazines or things like books and pans.

All I know is that the state sends me a form every month saying that my sales tax is due, and I figure that I'd better pay it. Which reminds me, I need to file this month's taxes. Thanks for the reminder! icon_lol.gif

jason_kraft Posted 13 Sep 2010 , 11:35pm
Quote:
Originally Posted by this-mama-rocks

Even if your state does not require you to charge sales tax on the final product, rest assured you will be liable for the use tax on all purchases. A cash-strapped state government is NOT going to let the entire business model be exempt from the sales/use tax.



Just to clarify...you owe use tax only when you buy stuff from a vendor that does not charge you sales tax. If your state exempts you from sales tax when customers buy your products, you are not liable for use tax or sales tax, although your customers may be liable for use tax if they live in an area where your products are not exempt from sales tax.

Is my understanding correct?

AmandaLP Posted 14 Sep 2010 , 1:06am

Really, you need to contact the tax office of your city/county/state, or have your tax professional advise you.

Taxes can be something that can shut down your business if you are not collecting them and/or paying them when you are supposed to. And since every city/county/state is different, you need someone who is doing business in your area to advise you.

In New York, I have heard of places being shut down and/or fined because they did or did not collect taxes. Be careful.

this-mama-rocks Posted 14 Sep 2010 , 1:30am

If your state exempts you from sales tax when customers buy your products, it's very highly likely that you are liable for use tax.

Your state government wouldn't be able to track down all the brides who bought your wedding cakes to get sales tax from them, but they are able to track down YOU, the business entity, to get the use tax from you.

Usually, it's not paying the employment taxes that will get a business shut down. But yes, not remitting any taxes that your business is liable for, has the potential to kill a business. We had the authority to seize the assets of a business, and sell them at auction, to satisfy the back taxes/penalties/interest that resulted from an audit.

this-mama-rocks Posted 14 Sep 2010 , 1:45am

I forgot to mention, if you are liable for use tax, you also have to accrue and pay any local sales/use taxes that an in-state vendor didn't charge you.

For example:

You are located in an area with state, county, and local jurisdiction sales/use taxes. You buy equipment from a vendor who is located in your state. The vendor is located in an area with state sales/use taxes, but no county or local jurisdiction sales/use taxes. You will need to accrue and pay the county and local jurisdiction sales/use taxes on the equipment you purchased from that vendor.

costumeczar Posted 14 Sep 2010 , 1:46am

I have to say that it's very refreshing to get answers form someone who knows what they're talking about, and who has actual experience in the field, instead of just a lot of "I heard this from my neighbor's cousin who used to date a guy who worked at the IRS office doing computer repairs"

jason_kraft Posted 14 Sep 2010 , 2:40am
Quote:
Originally Posted by this-mama-rocks

I forgot to mention, if you are liable for use tax, you also have to accrue and pay any local sales/use taxes that an in-state vendor didn't charge you.



That's the part I understand...but I've never heard of a business being held liable for use tax owed by its customers. The state has already collected the sales tax from the business (if the business sells tax-exempt products) via the supplies the business has purchased, since if you are not required to collect sales tax from your customers you are not eligible for a resale license to buy supplies tax-free.

If a customer lives in an area that charges sales tax on products that are exempt in the business's area, it should be the customer's responsibility to pay the use tax they owe.

this-mama-rocks Posted 14 Sep 2010 , 3:43am

"If your state exempts you from sales tax when customers buy your products, it's very highly likely that you are liable for use tax.

Your state government wouldn't be able to track down all the brides who bought your wedding cakes to get sales tax from them, but they are able to track down YOU, the business entity, to get the use tax from you. "
You (meaning "your business") sell a cake, and in your state, you do NOT have to charge sales tax when you sell the cake to the bride. Instead, it's highly likely that you will be liable for Use Tax on everything that was Used to go into that cake. If your state has ruled that yes, you are liable for the use tax, they will bill YOU for the use tax due on all the stuff you used to go into the cake. In this example, the tax burden is on YOU, the business, not the bride.

"but I've never heard of a business being held liable for use tax owed by its customers"
You (meaning "your business") sell a cake, and in your state, you DO have to charge sales tax when you sell the cake to the bride. You (your business) are located in Small Area, with a 4% state sales tax only; no local taxes are in Small Area. You charge the 4% state sales tax on the bride's invoice. You deliver the cake to the Big City wedding location that has 2% county and 1.5% city sales taxes. You (the business) are liable for the additional 3.5% sales taxes that you did not charge the bride. Tax Auditor will NOT try to track down your bride and bill her for the 3.5% sales tax on the cake. The auditor will bill YOU for it, and you can try to get the $$$$ from the bride (have fun, she'll love you for that).

"If a customer lives in an area that charges sales tax on products that are exempt in the business's area, it should be the customer's responsibility to pay the use tax they owe. "
No, that's not the scenairo in my example. You (meaning "your business") are now located in Big City (that has 4% state, 2% county, and 1.5% city sales/use tax rates). You buy a thingamajig for your business, and it will be taxable. You order the thingamajig from a vendor who's back in Small Area (4% state sales rate). Vendor charges you the 4% tax and ships the thingamajig. Tax Auditor will bill YOU for the 3.5% use tax on the thingamajig.

I hope I was able to make things a little clearer. It can be difficult to explain, especially when you're not face-to-face.

jason_kraft Posted 14 Sep 2010 , 4:02am
Quote:
Originally Posted by this-mama-rocks

You (meaning "your business") sell a cake, and in your state, you do NOT have to charge sales tax when you sell the cake to the bride. Instead, it's highly likely that you will be liable for Use Tax on everything that was Used to go into that cake.



Except if I do not have to collect sales tax from my customers, I do have to pay sales tax to my suppliers. Are you saying I would have to pay both sales tax and use tax for the ingredients?

Quote:
Quote:

You (meaning "your business") sell a cake, and in your state, you DO have to charge sales tax when you sell the cake to the bride. You (your business) are located in Small Area, with a 4% state sales tax only; no local taxes are in Small Area. You charge the 4% state sales tax on the bride's invoice. You deliver the cake to the Big City wedding location that has 2% county and 1.5% city sales taxes. You (the business) are liable for the additional 3.5% sales taxes that you did not charge the bride. Tax Auditor will NOT try to track down your bride and bill her for the 3.5% sales tax on the cake. The auditor will bill YOU for it, and you can try to get the $$$$ from the bride (have fun, she'll love you for that).



Interesting, thanks for the clarification. It sounds like it's important for businesses to know the tax structure in other counties/cities they deliver to and collect the appropriate sales tax based on the delivery address.

Quote:
Quote:

"If a customer lives in an area that charges sales tax on products that are exempt in the business's area, it should be the customer's responsibility to pay the use tax they owe. "
No, that's not the scenairo in my example. You (meaning "your business") are now located in Big City (that has 4% state, 2% county, and 1.5% city sales/use tax rates). You buy a thingamajig for your business, and it will be taxable. You order the thingamajig from a vendor who's back in Small Area (4% state sales rate). Vendor charges you the 4% tax and ships the thingamajig. Tax Auditor will bill YOU for the 3.5% use tax on the thingamajig.



In that example my hypothetical business is the customer and is buying the thingamajig from a vendor. Since my business is the customer in that case, I am responsible for paying the use tax, not the vendor.

That seems to be at odds with the earlier example of a bride buying a wedding cake from my hypothetical business. If the thingamajig vendor is not liable for the use tax in our earlier transaction, I'm not sure why my business would be liable for the use tax in the wedding cake example.

tpatmore Posted 14 Sep 2010 , 7:42am

How is the use tax computed?

jason_kraft Posted 14 Sep 2010 , 8:09am

The amount of use tax owed is equal to the amount of sales tax you would have paid on an item if you had purchased it in your city (including city, county, and state taxes) minus any sales tax you actually paid to your city/county/state for the item. If you paid sales tax to another city/county/state, I believe the seller should credit that back to you, but I'm not 100% clear on that.

In most cases, buying items locally results in no use tax owed, since you've already paid the equivalent sales tax. But let's say the total tax rate in your area is 10%, you buy a $200 item on Amazon.com, and Amazon does not charge you sales tax. You now owe your state $20 in use taxes, which you must declare on your state income tax return. You as the customer are responsible for declaring your use taxes owed.

The link below has more info (some specific to NY, but you should get the idea):
http://www.tax.state.ny.us/pit/income_tax/sales_and_use_tax_on_my_income_tax_return.htm

costumeczar Posted 14 Sep 2010 , 11:04am

Okay, so when I file my income taxes every year I declare the things that I've purchased online and pay the sales tax to them if that wasn't charged by the seller. I'm good with that (unfortunately I am honest and do declare and pay all that stuff, hahaha!)

With my previous example of the city or Richmond charging 10% on restaurants, though, should I check to see if the tax rate on wedding cakes in the city is also 10%? I charge 5% across the board, but if I'm understanding your example, I would owe an extra 5% if the delivery is within the city and not in the county? Uh oh.

What if the person ordering the cake lives in the county and files taxes there, but the delivery is in the city? Or what if they live in the city and pick the cake up (which wouldn't happen, I'm just pondering)

eatdessert1st Posted 14 Sep 2010 , 12:08pm

A friend sent this to me when we had a recent article about the "use tax" in AL. It's funny until you realize how true it is icon_razz.gif

The Tax Poem

Tax his land,
Tax his bed,
Tax the table At which he's fed.

Tax his tractor,
Tax his mule,
Teach him taxes Are the rule.

Tax his work,
Tax his pay,
He works for peanuts Anyway!

Tax his cow,
Tax his goat,
Tax his pants,
Tax his coat.
Tax his ties,
Tax his shirt,
Tax his work,
Tax his dirt.

Tax his tobacco,
Tax his drink,
Tax him if he
Tries to think.

Tax his cigars,
Tax his beers,
If he cries
Tax his tears.

Tax his car,
Tax his gas,
Find other ways
To tax his ass.

Tax all he has
Then let him know
That you won't be done
Till he has no dough.

When he screams and hollers;
Then tax him some more,
Tax him till He's good and sore.

Then tax his coffin,
Tax his grave,
Tax the sod in
Which he's laid.

Put these words
Upon his tomb,
'Taxes drove me
to my doom...'

When he's gone,
Do not relax,
Its time to apply
The inheritance tax.

LindaF144a Posted 14 Sep 2010 , 12:15pm

This is such a complicated thing that varies from state to state. And it can get you shut down in a heartbeat if you don't pay. I have seen establishments where I live experience this.

While there is great information here, you really should call your own local and state tax offices. Or talk to a tax lawyer in your area. If you are business you should have a lawyer. Most if not all lawyers will talk to you for free to find out what your business is and what they need to do legally for you. After that you are charged for the work they do when you call them. And personally after this last business we set up it is worth every penny.

If you are doing it wrong, your defense of I asked on a cake site will not hold. Go straight to the source for the best and up to date information.

Suzisweet Posted 14 Sep 2010 , 12:35pm
Quote:
Originally Posted by LindaF144

Most if not all lawyers will talk to you for free to find out what your business is and what they need to do legally for you. After that you are charged for the work they do when you call them.




Wow, wish our lawyer worked like that! LOL icon_biggrin.gif

I think she charges us for the initial hand shake!

AND all of our phone calls are rounded up by a 15 minute marker!! UGH!

LindaF144a Posted 14 Sep 2010 , 1:08pm
Quote:
Originally Posted by Suzisweet

Quote:
Originally Posted by LindaF144

Most if not all lawyers will talk to you for free to find out what your business is and what they need to do legally for you. After that you are charged for the work they do when you call them.



Wow, wish our lawyer worked like that! LOL icon_biggrin.gif

I think she charges us for the initial hand shake!

AND all of our phone calls are rounded up by a 15 minute marker!! UGH!



Then I would find a new lawyer! They are a dime a dozen right now.

Me, making lawyer jokes when my middle son is attending law school. Shame on me. icon_wink.gif

this-mama-rocks Posted 14 Sep 2010 , 2:25pm

Sales Tax and Use tax are simultaneous taxes. If you buy a taxable thingamajig (or taxable ingredients) and the vendor doesn't charge you sales tax on the transaction, you accrue and remit use tax.

In the wedding cake example, you should be charging the bride the appropriate sales tax. It's not enforcable to collect use tax from individuals, but it is enforcable to collect the sales tax from the seller. So in that instance, yes, if the wedding cake sale is taxable in your state, they would hold you (the cake seller) liable for the tax.

Yep, costume. The sales tax is due based on the location of "possession". So, if bride lives in Small Area, but you deliver the cake to her (she takes "possession" of the cake) in Big City, Big City's tax rates apply.

The use tax is due based on the location of "possession or of first use". So, in addition to the Small Area vendor and your business in Big City scenario stated above, get this!

If vendor is in Big City and your business is in Small Area, and you go pick up the thingamajig from Big City, you owe 7.5% tax (4% state, 2% county, 1.5% city). Why? Because you "took possession" of thingamajig in Big City.

If vendor is in Big City and your business is in Small Area, and you have thingamajig delivered to you in Small Area, you owe 4% tax. Why? Because you "took possession and first used" the thingamajig in Small Area.

If anyone chooses to talk to a professional about sales/use taxes, either consult with a tax lawyer or contact your Department of Revenue (or Dept of Taxation). Sometimes the REvenue Departments will hold sales/use tax workshops for small businesses. I would NOT talk to you accountant/CPS, because they only know how to fill out the sales/use tax forms, not how it all works. For years, I had people scream at me "why didn't my CPS tell me any of this??!!!!!!" when I handed them the audit bill. Good times, good times.

costumeczar Posted 14 Sep 2010 , 2:59pm
Quote:
Originally Posted by this-mama-rocks


Yep, costume. The sales tax is due based on the location of "possession". So, if bride lives in Small Area, but you deliver the cake to her (she takes "possession" of the cake) in Big City, Big City's tax rates apply.

.




Booooo. Now I need to go see how they tax wedding cakes in the City of Richmond. They have that super-special extra tax on restaurants, but I don't know if it applies to delivered cakes too. I doubt it but you never know.

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