Charging Sales Tax for Cabinetry
Sales tax laws vary from state to state and situation to situation. Here's a closer look. June 2, 2009
Question
I file sales tax quarterly here in PA (6%). Let's say I collect a down payment of 50% total job cost at the start of the job. Should I be reporting 50% of the total tax to be collected for the job at the end of that quarter, or report 100% at the end of the job?
Forum Responses
(Business and Management Forum)
From contributor H:
Not sure how it works for you but I am in GA and I believe we are set up as what is called "cash" for sales tax purpose and whatever we collect is taxable during that period. Since the down payment is usually mostly for materials/contract I would think even if you break the job down into labor and materials tax would be reported during that period.
From contributor P:
Call your accountant. That's not the way I do it, and I'm in PA also. But your accountant will have the correct answer.
From contributor Z:
I am also in PA. I have long given up collecting sales tax ( turned in my license) due to the nature of my business. We install everything we make as a contract price. But as contributor P stated ask your accountant. Always pay the tax on your material.
From contributor P:
Why do you say that? I never pay tax on my material, but I don't find collecting the sales tax on finished goods to be onerous. Might be different with built-ins, I wouldn't know. Most of what I build gets shipped out of state and tax isn't due on it anyway.
From contributor T:
I'm guessing PA treats contributor Z's work the same as in NJ, where I am. There are special tax considerations for "fabricator/installers" that allows the cabinetmaker to sell the cabinets and installation labor exempt from sales tax when the work is a capital improvement to the end user's property (like a built-in), and installed by the same company that built it. If you go that route, the cabinetmaker is required to pay sales tax on the materials, and in NJ, we're required to keep a sales tax exemption form on file for each job that meets this criteria.
To the original question, if PA is like NJ, I believe sales tax payments are based on the "accrual" method of accounting, which says taxes are due when the sale occurs. Check with your accountant or ask someone in the state taxation office.
From contributor C:
As a small fabrication shop, I've done it both ways and like contributor Z long ago gave back my resale license. I basically need to pay tax on material that gets used in a project and the easiest, most cost effective way to do that is to simply pay sales tax to my suppliers and have them do the accounting. Maybe I'm missing something? I'd be curious to know contributor Z's logic. I'm in California.
From contributor L:
I'm in Nebraska and here you need to collect tax on the total price of the cabinets not just the materials. Taxes are due during the month that the invoice was billed for the amount billed (applies even if you haven't been paid yet).
From contributor Z:
My logic is this. Pay tax on your material to your supplier. No paperwork for me. A sales tax exemption does not mean you don't have to pay the tax. You are supposed to pay it or part of it, dependant on what it is and how it’s used, directly to the state yourself, but many don't.
We do not break down our invoices into labor and material. We give a total price delivered and installed to spec. It’s the same as a contractor building you a home/garage/deck/or doing improvements. They do not charge or collect tax from you, they can't, yet they must pay the tax on the material purchased and figure that as a cost into their price.
Even some things that are sent out of state must be taxed if the receiving state has a reciprocal agreement with the sending state. Try telling a mail order company in another state that you don't have to pay the sales tax. It works for me. Years ago when I turned my resale cert in I was audited and for to be within the law based on my business. If I ever give up installing it will be a different story.
From contributor K:
I see it the same way contributor Z does, right or wrong. I would like to know why some think they need to pay sales tax on their labor? Does each state vary on this matter?
From contributor H:
I'm not sure if it is that different but we were told we must collect sales taxes when we started up. I too like the way contributor Z does and sees it. However I also see any tangible item having labor to produce it be it a car, washing machine so really what’s the difference? I know some guys that separate it around here. I just charge per foot price and try to stock materials to cover the job and then sometimes I can run an entire job from mostly drops. In the end the taxes get paid and then I just try to stay in the good graces of the state!
I have made some price increases that I made them as options like a finish fee, delivery and installation fee, I know that is splitting hair. Those are non-taxed and if want a paint grade or self installed I still get my pre-increase price. I purchase my finish products from out of state non-taxed, I buy my hardware out of state too but the company has an office in state and thus I pay sales tax on cutters and sandpaper and then collect tax on hardware. It is a crazy world we live in. I know this is chasing rabbits but just the way I think sorry.
From contributor S:
I say report 100% at the end of the job. In my opinion, a down payment is considered a liability - that is, by accepting the down payment, you have agreed to an obligation to perform a future service for which you expect payment. And the liability should show-up as such on your financial statements. This liability is not taxable activity, therefore is not subject to sales tax.
From contributor F:
I have sold into about 40 states so we did the research on every state we went into. Most states tax the product not the installation, many states tax only the material on an installed project. There is a big difference between a product you install to the real estate and one that is freestanding from a tax point. If the general installs the total price may be taxable
In California what we found about 20 years ago is the state had told us to collect the tax incorrectly. I went to a Saturday breakfast meeting with six shops doing similar work and asked each one of them how they were doing their sales tax.
Every shop doing the same type of sale was instructed by the auditors to do it differently. On Monday following the breakfast I called a lot of different regional tax offices and got different answers to the same question. Long story short we did more research and challenged the tax board at an audit (against my former accountant’s advice) and we received a 75k refund. My point is find someone that knows the local tax law and get a written ruling on the method you use.
