Taxpayer asks:
Hi,
So, if I bought, let’s say, some scarfs at a local New Jersey store and paid sales tax on them, then sold them at a house party, am I required to charge and collect sales tax?
Thanks for you input. You’re the best!
Taxgirl says:
The rules for charging and collecting sales tax vary by state, so this is really a state specific question which I usually avoid. But this question does lend itself nicely to a general answer. Remember to consult with your local tax professional, though, for specifics about the rules in your own state.
The general rule is that sales tax is only paid on a product at one time. Wholesalers generally do not charge sales tax (they get a clearance not to do so from the state) and retailers do charge sales tax – to you, the consumer. In this way, the tax gets paid at the end of a series of transactions for the same product.
An exception to this rule involves the resale of a product when the initial seller is not a wholesaler or otherwise exempt. In this case, sales tax would be charged at the first sale – since it’s not exempt – but that doesn’t automatically give you a pass to not charge sales tax when you turn around and sell it again. While the transaction would be likely be exempt, many states will require you to get a certificate to memorialize the exemption.
These rules apply to products that are not substantially altered – like the scarves that you mention that you simply buy to resell. But what if you changed the product? What if you used the scarves to make a cool purse? Or you sewed them together to make a coat? If you significantly change the product in order to sell it, it’s not the same product anymore and the resell rules would not usually apply. Sales tax would likely be charged and collected at each sale.
All of that said, this is not an easy area of tax law to understand because it’s so specific to state (and even local) tax laws. There are exemptions, exceptions and special circumstances according to industry, usage and locality – so again, be sure and check with your local tax pro for more details.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
The easiest way around this is to move to Minnesota where there is no sales tax on clothing.
As a specialist in sales tax, this question is always asked by people who have hobbies or a small enterprise on the side. Most states examine your hobby or enterprise to determine whether it is a business. In New Jersey, for instance, if you were a person selling scarves at a house party, you’d more than likely be required to apply for a Business Registration Application. However, there’s good news in New Jersey, because most clothing articles are not subject to sales tax.
But kudos for Kelly for giving the right advice out here. Sales tax is *very* state specific. I’ve been working in the sales tax area for over 10 years and what works for one industry in one state, may not work in the same industry in another state. My advice to anyone intending to sell something on an ongoing basis — check with a local tax professional first. Telling the tax authority that you didn’t know that the 1,500 scarves you sold last year were taxable usually doesn’t relieve you of the obligation to collect the tax. However, if there is an obligation for you to collect the tax and you don’t, you will probably have to pay for it out of your own pocket.
generally… what constitutes a hobby? @ Christmas I make ornaments and sell them at our town Craft bazzar. I have no problem adding tax if necessary but would prefer not to as it would detract from the “yard-sale” appeal of the bazzar.
Chris, thanks much! It is a really specific area, I don’t think people realize how very specific. I get a few questions each month assuming that the rules are federal and only rates are determined by the state – *not true*.
Terri –
For a quick primer, check out this prior hobby post.
For more on related deductions, check out this post.
A minor semantic nuance; you mentioned “charging” the sales tax several times. We did craft shows for a living for many years and a regular question was “do you have to charge the sales tax?”. Our answer was always “we don’t charge any sales tax, but we do collect it for the folks you voted for, that imposed it”.
Thanks, that helped a bit!
Terri — Again, a word of caution. Kelly’s primer about hobbies and business is a good start. However, in the world of sales tax, most people would be surprised to know that while the IRS may treat your hobby as a hobby, your state (or local government) may actually take two differing positions. The state may agree with the IRS and make you treat your hobby as hobby and disallow those state income tax deductions all while informing you that you need to be registered to collect and remit sales tax!
Some craft show vendors have the sales tax built into the price so that they don’t lose that “yard sale” appeal. However, believe it or not, some states make this practice illegal because it gives an unfair advantage to the seller. If you want some specific advice about your situation, you can drop me an e-mail at my website. But the free advice is to contact your state revenue department with an anonymous question — You don’t need to tell them who you are. Once you have all the necessary information you can make the informed choice as what you need to do for your situation.