When does giving something away trigger sales tax?
Giveaways are an unavoidable part of doing business. Whether you’re trying to win over new customers or it’s an act of goodwill toward your vendors, it can be one of the best ways to promote your product.
For wholesalers and distributors, however, giveaways can leave them open to paying sales taxes. Like retailers, wholesalers and distributors can be subject to either sales or use tax, depending on state laws. Here are a few things wholesalers and distributors should know about sales tax and giveaways.
Wholesalers and taxes
Sales tax laws for wholesalers and distributors rely largely on what will be done with items after they’re purchased. If a merchant purchases an item from a wholesaler with the intention of charging sales tax on it, the wholesaler doesn’t have to collect tax since it will be collected at the point of purchase by the final user. If, however, the retailer will not be charging sales tax at the point of purchase, the wholesaler is responsible for paying sales tax when items are sold to merchants.
Wholesalers also aren’t responsible for paying sales tax on items that are being purchased to be used as raw goods. So if a clothing manufacturer purchases fabric from a wholesaler, the wholesaler doesn’t pay sales tax, since that fabric will be used to create a product that will then be resold, with sales tax charged.
Sales and giveaways
Understanding how this part of the process works is fundamental to understanding why wholesaler giveaways may be subject to sales tax. This part of the law can be confusing at times, since it also relies on what the recipient is doing with the product. As mentioned above, if a wholesaler sells an item that will then be resold, sales tax does not have to be collected, since it will be collected when that customer resells the item to its own customers.
However, in the case of a giveaway, wholesalers have no idea what will happen to the products. The giveaway could be kept for personal use or given away to the retailer’s own customers. For that reason, state laws often account for the fact that no tax will be paid at any point in those instances and place the burden of paying sales tax on the wholesaler at the time of the giveaway.
When it applies
Complicating matters further, there are a variety of giveaway types that apply to businesses. A wholesaler could provide samples of its products to win retailers’ business, for instance. Or a distributor could hold a promotion and offer a free item to the first 100 customers who email or post on social media about it. In these cases, sales tax must be paid on the value of each product being given away in accordance with regular sales tax requirements.
Another taxable event occurs when a wholesaler or distributor pulls an item from inventory to use personally or professionally. An office supply distributor may pull a bundle of legal pads to use internally, for instance. A jewelry distributor might admire a pair of earrings and choose to wear them to a big event. In this case, just as in the case of a giveaway, there will be no guarantee of a taxable event further down the line, so it’s important that the wholesaler claim sales tax on the item at the time it is removed from inventory.
Sales tax laws vary from state to state, so it’s important to become familiar to the laws specific to each state in which your business is giving products away. While the guidelines may be complex, once you are familiar with what needs to be done, it will be easy to provide samples and offer gifts to valued customers.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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