Sales Tax Basics for Interior Designers and How To Get Set Up to Sell Trade
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Now, this may be old hat for many of you, but if you have a newly established business or have been hesitant to sell trade because of the fear of sales tax, this article is for you!
If part of your revenue comes from the resale of goods (whether it be furniture, fabric, accessories, or cabinets and countertops), and you purchase those items from a to-the-trade vendor at net pricing, then everything in this post is critically important to you.
Sales tax (that we all pay every time we go shopping) is paid by the end-user of goods or merchandise. When you—as a designer—purchase goods and sell them to your clients, those clients are the end-user (not you) and therefore must pay sales tax to the state and sometimes also to a local jurisdiction (county or city) tax collecting agency. You collect the sales tax from the client and remit it to the state.
Let’s talk about three parts of this process:
Purchasing from a to-the-trade vendor.
Selling goods to the client (the end-user) and collecting sales tax.
Paying that sales tax to the state and local tax collecting agencies.
And, if this is new to you, be sure to check out Design Business Foundations, where my team and I walk you through setting up your interior design business on solid footing from day one and provide six weeks of expert 1:1 support.
01 | Purchasing Products from a To-the-Trade Vendor
When you purchase from a to-the-trade vendor, you do not pay sales tax at the time of purchase, as you are not the end-user of those goods. You typically purchase at a price that is lower than the MSRP (manufacturer’s suggested retail price), therefore, you have the opportunity to collect revenue when you sell those goods to your client at a mark-up from that lower (sometimes called net) price that you paid the vendor for the goods.
You can sell those goods to the client at any price you wish: either the MSRP, or some percentage of mark-up that you determine. To see my thoughts on the topic of how to determine your mark-up, and whether to disclose it to your client, read this post about why you SHOULD NOT call it a discount.
But, in order to qualify to make purchases from your vendors without paying sales tax, and at net pricing, you must obtain a sales tax permit for your business entity. In different states, this might alternately be called a resales license, sales tax license, seller’s permit, resale tax certificate, certificate of resale, tax identification number, sales tax exemption number, exemption certificate, or another similar-sounding term.
Fun, right?
In short, this sales tax exemption certificate/license/number gives you permission—as a representative of your business entity—to make purchases without paying sales tax to the seller (the to-the-trade vendor) at the time of purchase. It also allows you in turn to be a reseller of those goods – selling them to the end-user, your client, and collecting sales tax when you make that sale.
The way you obtain a sales tax exemption certificate/license/number is simply to go to the Department of Revenue website for the state in which you will be purchasing and selling goods, and find the location (usually in an Information for Businesses section) where you can apply. The application process can typically be completed online or may involve sending some paperwork through the mail.
Beware that having this sales tax exemption certificate/license/number comes with some responsibility. The state now knows that your business re-sells goods and collects sales tax, so you now need to report tax collected to the state on a regular basis. Just as a state or federal revenue service will be none-too-happy if you don’t file your personal income tax each April 15th, they also will track you down if you fail to report your sales tax activity!
Once you have this sales tax exemption certificate/license/number, you will keep it until you either close or modify your business (such as converting from a sole proprietorship to an LLC or S-Corp), and you will use the corresponding number for any non-sales tax purchasing from vendors, and all sales tax reporting of tax collected from end-users. Even though it may be called a license or certificate, these days, there is often no actual piece of paper issued by the state, typically just a corresponding number.
However, there is one more step after obtaining this sales tax exemption certificate/license/number from your state. You must also fill out a simple form, indicating that sales tax number, the first time you do business with any new vendor (the seller, in this case). That vendor (seller) will keep this completed form on file, and know that—because you have a sales tax exemption certificate/license/number, you will not pay sales tax when you make purchases. This form is called a Certificate of Exemption, or perhaps a Sales Tax Resale Certificate, or something similar depending on your state.
I know what you’re thinking! Doesn’t the name of the thing that allows me to make tax-exempt purchases and the form I use to report my tax-exempt number to new vendors sound an awful lot alike?!?!? Yes, the names of these two things can seem repetitive or redundant, depending on how your state chooses to name them. So confusing!
When you do business with a new vendor for the very first time, they likely may have blank copies of your state’s Certificate of Exemption for you to fill out. Or, you can go to your state’s Department of Revenue website and download and print a copy of the certificate, and fill it out in advance, or, you can use a form that is intended to be used in any state. You fill out the form, and the vendor keeps it on file.
This form varies just a bit from state to state, but the information you need to provide on it is fairly simple:
the name and address of the seller (the vendor whom you are purchasing from on a tax-exempt basis)
your business name and address (you will be the re-seller)
the reason you are purchasing as tax-exempt, which is that you are to be a seller (or reseller) of goods to your client
description of the items to be purchased for resale (typically you can say furniture and home goods)
and, the number from your state’s sales tax exemption certificate/license/number
Now that you know how to get set up with a sales tax exemption and work with trade vendors, the next step is making sure you handle it correctly once you’re selling to clients.
Inside The DTS Files, you’ll get my detailed breakdown of:
Which goods, services, and fees may be taxable in your state
How to determine the correct tax rate for each client
How to invoice so you’re compliant (and don’t leave money on the table)
How and when to file and pay sales tax so you avoid penalties
