This is part 4 of a 4-part series. Other articles in the series:
Part 1: “Origin-Based Versus Destination-Based Sales Tax: Which One Applies to Your Business?”
Part 2: “Understanding Sales Tax Nexus for Out-of-State Sales”
Part 3: “Should Sales Tax be Added to Your Design Services Fees and/or Shipping Charges?”
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Where interior designers source products and furnishings from impacts profitability and has sales tax implications, and we see a variety of approaches. Traditionally, interior designers purchase from manufacturers, showrooms, and other sources who sell to-the-trade exclusively. Interior designers typically need to show that they have a legitimate interior design business and that they have a sales tax permit that allows them to make tax exempt purchases.
But many interior designers also make purchases—on behalf of their clients—from retail outlets or shops that sell to the general public. They may make this choice for a variety of reasons: there isn’t a design center or to-the-trade only showrooms in the designer’s area, their clients desire merchandise from sources such as Pottery Barn or West Elm, it’s convenient to purchase from high-volume retailers such as Home Goods, or the interior designer sources vintage and antique items for their clients.
These sourcing choices have a significant impact on the amount interior designers can earn in markup on goods sold. When they resell items from to-the-trade-only sources, designers have far greater latitude to set a price with a higher mark-up, because clients do not have access to these products as purchasers.
While retailers such as Pottery Barn do often provide discounted pricing to designers (who have set up a trade account), the discount is often small, and is often not as low as sale prices offered to regular customers. And if an interior designer attempts to re-sell to a client at a higher price that the retailer is offering, a client will most certainly balk, and insist on making their purchase themselves to avoid the markup (which is actually sometimes the best scenario for retail products used in a design).
So, where interior designers source products from can have a significant impact on their ability to earn revenue on the markup of goods sold. But whether an interior designer is re-selling retail or to-the-trade-only products and materials, these scenarios also have implications for sales tax collected and paid, which can also impact a designer’s bottom line.
Let’s look at a few scenarios:
Scenario #1: In the first scenario, you are purchasing through a tax-exempt to-the-trade-only seller (a design showroom, manufacturer, or wholesaler). You have a sales tax permit that allows you to purchase tax-free from specific sellers who allow that. You purchase the item for $100. You pay no tax, just the $100 to make the purchase. You turn around and sell the item to your client for $130, a 30% markup. You charge the client the sales tax. The applicable sales tax rate is 7%. The sales tax for this sale is $9.10 (130 x .07 = 9.10). So you charge the client $139.10. You have been reimbursed the $100 you paid for the item. You earned $30 in markup. And you remit the $9.10 in tax collected to your state when you file your sales tax return (annually, quarterly, or monthly, whatever is required of you).
If, on the other hand, you are purchasing from a retail source, and you are paying taxes at time of purchase (like when you check out at Home Goods), there are two ways this could go:
Scenario #2: You make a retail purchase (such as through Home Goods) that you will get reimbursed for by your client. The item is $100. The sales tax rate in your area is 7%. So you pay for the purchase, a total of $107.
You then turn around and request a reimbursement from the client for $100 plus $7 in tax = $107. You have been fully reimbursed. Since this transaction is recorded and treated as a reimbursable and not a sale, then no reporting of this transaction needs to happen when you file your sales tax. You have brought in no revenue from this transaction, and the sales tax was already paid when you purchased it for $100.
Scenario #3: You make a retail purchase (such as through Home Goods) that you will resell to your client. The item is $100. The sales tax rate in your area is 7%. So you pay for the purchase, a total of $107.
You then turn around and sell the item to a client for a markup – $130 or 30%. You charge the client 7% on the amount or $9.10 (130 x .07 = 9.10). So you charge the client $139.10. When you file your business sales tax, you remit the $9.10 you collected from your client to your state’s Department of Revenue (annually, quarterly, or monthly sales tax reporting – whatever is required).
There are two separate transactions, both of which get taxed. The state gets $7 of sales tax for the first transaction, and $9.10 for the second transaction—because the item was sold twice—both of which were taxable sales.
Unfortunately for the interior designer, this results in less mark-up revenue. That is one of the issues with re-selling retail items. Here, you are paid $139.10 by the client, you have to remit $9.10 to the state, and your initial purchase was $107.
139.10 – 9.10 – 107 = 23. You only earned $23 on this sale, even though your markup was $30. You lost some money on the sales tax transaction. Uncle Sam earned more, and you earned less.
Versus the purchasing from the trade scenario. You sell the item for $139.10 – 9.10 in sales tax – $100 your cost = You earned $30 on this sale.
Of course, you could charge additional mark-up on this retail item, to account for your tax paid. If—instead of charging the client $130 for the item—you charge the client $137, you will make your full $30 in markup. But the clint is paying more, and Uncle Sam still ends up with more money in his pocket as a result of double taxation.
It is important to be aware of the tax implications of purchasing and selling retail items. Check out this post for additional information about how to set up accounts with to-the-trade-only vendors and showrooms, and our Beyond Retail Training for Interior Designers who want to sell to-the-trade furnishings.
Disclaimer (by original author): We are not accountants or tax attorneys. This blog series is for informational purposes only and should not be considered legal or financial advice. Please consult with an accountant or tax professional for guidance on your specific situation. You can also contact the support team at your state’s Department of Revenue. Each state’s DOR web page should include an email address and toll-free phone number (under Contact Us) for you to reach out with specific questions about business sales tax in your area.