Did You Know? Detailed Sales Tax Reports Help You Avoid Costly Mistakes
Original photography posted on Unsplash by Clay Banks.
Original article posted at Design Manager.
Reporting sales tax to State Revenue Departments is a complicated matter for interior designers. That’s because most businesses that use resale licenses do so to buy goods wholesale on a recurring basis from a limited number of vendors, and then sell them by way of set retail locations. Interior designers, on the other hand, buy wholesale, or “trade” products from a wide variety of vendors that are located all over the world, and then sell them to clients across a range of locations.
That’s why it's imperative to track every transaction on a granular level. Fortunately, Design Manager can produce a sales tax report that breaks down every cent that makes up the top line numbers in a matter of seconds (whereas other accounting software for interior designers do not provide the level of detail necessary to ensure a business is paying the correct sales tax). Having that level of understanding is the key to not overpay or underpay your sales tax, and to avoid costly penalties.
How Sales Tax Works For Interior Designers
As we covered, understanding interior design sales tax is not easy by any means. Each state has its own specific sales tax laws that must be followed by an interior designer doing business in that state. In addition to state sales tax laws, laws can change by city, county and municipality, as well.
Let's look at one example, New York City. (please remember that this is one example and could differ from sales tax laws in your location!) In New York City, for example, interior design services are exempt from local taxes, while in the rest of the state they are taxable on both the local and state level. Here is a break down of how it works:
An interior designer buys goods from vendors at a discount using their resale license, for which they pay no tax.
The designer then charges the client, and taxes the client based on the state and local tax rates of the location of the project site.
Sales tax is only collected when a transaction is complete. The definition of complete is vague. It can be interpreted as when the end client pays for the item in full, or when the installation of the item has been completed.
Certain services, such as capital improvements, are tax-exempt.
In most cases, shipping costs are tax-exempt.
Businesses are required to pay estimated sales tax on a quarterly basis; it is incumbent on the business to track how much they actually owe, with proof, to ensure they are properly assessed and reimbursed, if applicable.
Failing to pay sales tax can result in significant financial penalties and in worst-case scenarios, seizure of assets.
It is a good idea to consult a tax professional, particularly one who specializes in interior design, to ensure your business is fully compliant with the necessary laws and regulations.
Why Accurate Accounting Matters
We had the pleasure of speaking with Peter Lang, The Designer CPA, and Staci Davidson, operations manager at Leighanne Lamarre Interiors, about the importance of robust sales tax reporting. Peter has years of experience as a CPA and works exclusively with interior designers as clients, so he is Design Manager’s go-to expert on all things tax-related. He says that accurate reporting is essential to becoming a successful business owner. The ability to pull up any piece of information and answer any accounting questions – whether internally or externally – increases productivity and helps to catch bookkeeping mistakes early. The consequences, particularly as it relates to tax reporting, are steep. From Peter:
“When it comes to taxes that are owed, whether sales tax, income tax, or payroll tax, your lack of knowledge of what comprises the top line numbers can get you into trouble with vendors and jurisdictions. You could end up losing your sales tax license altogether, which would mean losing your discount and in some cases, access to the products that are sold strictly to the trade.”
For Staci, the lack of reliable, detailed sales tax reporting caused a major headache for Leighanne Lamarre Interiors, a high-end residential interior design firm specializing in new construction and renovations. Before switching to Design Manager, they were using a competing industry-specific software which pulled data from their QuickBooks records. Not only did the competitor's reports only include the top-line numbers without any ability to break out granular data, the numbers the competitor software pulled from QuickBooks were incorrect. Staci says:
“Not only were the number and types of reports that the competitor’s software offered limited, we found several instances of inaccuracies in the reports. The software was pulling data from QuickBooks in an inconsistent and indiscriminate manner. As a result, we went through a period of overpaying our sales tax, which was a costly mistake. We also spent a significant amount of employee resources on fixing the problems caused by this technical disaster.”