17 Nov Ask the Expert – Sales Use Tax
Ask the Expert – Sales Use Tax
Q – We are a sub-contractor and distributor. We have customers that are taxable, resale, and we also use materials for a few specific jobs. My question is when invoicing (as a lump sum) for work done, how can I apply use tax to calculate and not show?
A – Sales tax and more specifically use tax, presents several unique issues. There are two methods that have worked most effectively for those clients who are adamant that they do not want the sales tax to show. But first, let”s discuss briefly the most efficient method, even though it may not be acceptable from an invoice presentation stand point.
It is possible to create a group that includes both several items, and as a job is to be invoiced, additional items can be added to the group. The items can be taxable (such as materials) and non-taxable (such as labor) and included in the same group. The problem with this method is that the sales (or use) tax will show on the invoice so it is possible that the customer can figure out the cost of the materials and labor if they wanted to go through the calculations. The advantage is that the sales tax is recorded automatically and the sales tax liability reports will be clean.
Assuming this first option is not acceptable, there are two other possibilities.
The first is to create an invoice using the lump sum item as usual, then create a second invoice that is for the materials that are subject to use tax using the same lump sum item, the enter the same lump sum item as a negative on the invoice for the materials and sales tax so the net invoice is zero. This will automatically accumulate the sales tax and taxable versus non-taxable sales amounts on the reports.
Depending on the industry and the type of items (i.e. specific items, even inventory items, not a general item like “materials”), the other alternative I have found to work well is to put the actual items on the invoice with a zero cost. The advantage if the items are for inventory is that the inventory quantity and value is reduced and reclassified correctly to the cost of goods sold account but the customer is not charged for the items, and therefore, is not charged sales tax. When it is time to complete the sales tax returns, a report is generated for the appropriate items that have been sold for $0. This report is then used as the basis for determining the cost of the items and then the use tax as appropriate to its maximum advantage.