# how to keep (not sell) wholesale product & not get in tax trouble?



## booens (Aug 8, 2007)

i'm at the very begining stages of starting my business & am very anal & want to do everything right/legal. i'm still trying to wrap my head around all the paperwork & tax stuff but i thought i read somewhere that you can not purchase anything wholesale that you are intending to keep or give away, i.e. not 'sell'. how do you keep shirts for yourself, family, you records, etc & not get in trouble with your taxes? my friend had a clothing line & she offered to 'give' me a skirt. she's not selling it - is that bad? how do you go about that? i'm sure everyone does it, right? i mean you're not going to charge your mom or husband full price, if any cost at all, for your product!


----------



## peteVA (Nov 11, 2007)

Legally, anything new you come to possess without paying sales tax on it, other than a gift or something that has been bought with tax paid by someone else, you should pay a Use Tax.

This is also true when you buy something as a tax exempt retailer and then keep it for your own use. In many states there is a section on the sales tax return where you can enter the value of goods taken from inventory for use. This could be a beautician taking home a bottle of chemicals, a office supply store owner taking home some office supplies for the kids, etc. Or using box of staples for the office stapler.

In reality, this never happens. People are even supposed to report everything they bought on the net or phone from out of state with no sales tax and pay the tax with their tax returns. I know you've been keeping track. 

It's just one of those things that should, but don't happen. Do not fear, you will not be carted off to jail over it. Take the skirt and wear it in good health.
.


----------



## Girlzndollz (Oct 3, 2007)

Pete, in PA, we don't pay taxes on clothes retail. I would think there wouldn't be a use tax in that situation, would you agree?


----------



## peteVA (Nov 11, 2007)

No, I was talking in general, not in your specific case. No tax on clothes, no problem with use tax.
.


----------



## Girlzndollz (Oct 3, 2007)

peteVA said:


> No, I was talking in general, not in your specific case. No tax on clothes, no problem with use tax.
> .


 
Yeah, yeah, the net and all. But the question on wholesale tees was the part I was most interested in. So, for anyone who's state doesn't charge sales tax on clothing, there no issue whatsoever for them (me as well.) Makes life a little easier, but though it doesn't affect me, I do wonder how that works in states that charge sales tax, and what about clothes you buy and ruin during a run, or stock you hold onto unsold from cycle to cycle? I am relived I don't have to worry about figuring that out, but now my silly brain is curious again. Better go to sleep instead. Thanks for your response, Pete, I appreciate it.


----------



## scpromos (May 27, 2006)

I'm in California, on our form there's a section for use tax on items that were bought wholesale (no sales tax) and not re-sold. We look back at all our samples and self promo orders and pay a use tax on those items. That keeps us in the clear.


----------



## Girlzndollz (Oct 3, 2007)

Thank you for your answer, I appreciate it.


----------



## Moo Spot Prints (Jul 16, 2006)

Or you can just buy it from yourself at cost and pay tax on that. Any way you do it you should keep good records.


----------



## peteVA (Nov 11, 2007)

A lot depends on the size of your operation, and again where you are. I'm a great believer in giving away the stuff that can't be sold. No tax if there is no sale. And most charities are exempt anyhow, I would imagine. Again, a state by state deal.

As far as ruined goods, keep in mind you are not required to account for every blank you purchase, you are collecting tax on what you sell. It may seem like the same thing, but it is not. Sales Tax is a tax collected on goods you receive money for.

Ruined or damaged goods are Accounted For in your bookkeeping, but have nothng to do with sales tax. You didn't sell them, you didn't take them home for the dog, they have little or no value to anyone. They are just a cost to your business. Some people do "write them off" on their books, but that still has no bearing on sales taxes.

Personally, let the Cost Of Goods Sold account handle the cost of runied goods. You buy so much, you have so much inventory left at the end of the year, everything else goes into COGS, whether it was truly sold, eaten by the dog or thrown in the trash. 

Starting Inventory $10,000
Purchases for the year $50000
Should be $ 60000
Ending Inventory $15000
Cost of goods sold - $ 45000 This will automatically cover what was stolen, ruined, eaten, etc. 

But it has no bearing on sales tax. You can give the item away and pay no tax. You get in trouble when you actually try to avoid the tax by selling at unusually low prices to friends, etc. 

The sales tax people are really interested in - 

How much did you sell
How much tax did you charge
Send it to us.

They don't care about what you didn't sell. The income / corporate tax (feds) might be, but sales tax is sales - or removed from inventory for business or personal USE as a use tax. That's it.
.


----------



## TripleT (Apr 29, 2007)

peteVA said:


> The sales tax people are really interested in -
> 
> How much did you sell
> How much tax did you charge
> ...


 
That's the way I see it. They are especially interested in the "Send it to us" part.


----------



## MoustacheKC (Mar 19, 2007)

Giving away items (whether it's your product or a pen with your name on it) can (and probably should) be considered a promotional expense. I regularly give away and wear my own shirts for marketing purposes. Accounting-wise, I credit my inventory account and debit marketing expense for the cost of the shirt (I use avg cost valuation method).

Whether or not you paid sales/use tax on the original purchase is unrelated to the giveaway. You'd only get in "trouble" if you avoided any tax you might owe at the time of the original purchase. As stated already--a giveaway generates no sales tax liability since no sale transpired. 

P.S. As far as income tax goes, I'm pretty sure that Business Gifts are limited to $25 per person per year so be careful with how much you're giving away and to whom.


----------



## lucillef (Feb 26, 2007)

Does anybody take the actual cost of the shirts that they give away, and use this as an advertising expense on their taxes? 

This is how I'm planning to do it this year, if it iwill be an acceptable expense.

Lucille


----------

