One of the questions I get asked the most from interior designers is, “Do I have to pay sales taxes for purchases?” The short answer is yes.
Sales tax is one of the most complicated taxes because it is dictated by the states. Everything about it can vary depending on the location of the project—the rate, the due date, and which items are taxable. Some states tax the product and the service you are delivering, while others only tax the product.
Who Pays the Tax?
By law, sales tax is imposed on the individual who is the end user of the product or service. Therefore, an interior designer’s customer is the person who is liable to pay the sales tax, and the designer must charge the tax and be responsible for remitting it. An interior designer may choose to pay the sales tax on behalf of the customer, but this is technically incorrect. Let me explain.
Let’s say you, as an interior designer, decide to purchase the furnishings for a project on behalf of a customer. When you make the purchase, sales tax will be imposed on the item. If you don’t have a resale certificate, you will be required to pay the sales tax at the time of payment. At this point, you have paid the sales tax and shouldn’t charge the customer for it, because the tax would then be double counted. If you do have a resale certificate, then you would present that to the vendor. This would allow you to purchase the item at wholesale, and you would not be charged the sales tax. Then, when you are ready to invoice your customer, you would charge them the sales tax and remit it to the state or local jurisdiction.
In both cases, the sales tax has been paid, but the correct way is for you to purchase the item at wholesale and then resell it to your customer.
What Is Taxed?
In most states, only products are taxed. In some states, services are taxed as well. This means that you will be required to charge and remit sales tax on your design fees. There also are states where real estate construction is subject to sales tax, such as during the moving of walls and other remodeling tasks where the renovations are not considered capital improvements. Capital improvements are changes that increase the value of a property, such as plumbing and electrical work.
Examples of items subject to sales tax may include furnishings, draperies and coverings, interior decor, and similar items. Design fees, architecture fees, staging, lighting and sound design, and plans and renderings are types of services that may be subject to tax in some states. Items that are typically not taxed include shipping costs and capital improvement costs. Remember to check with your state jurisdiction to determine which services are subject to sales tax.
When Are the Taxes Due?
Sales tax is typically due monthly. Depending on your state regulations, if your sales are less than a certain amount, your filing requirements may change to quarterly or annually. Regardless of your payment frequency, the tax is due in the month immediately following the period when the sale occurred.
For example, under the monthly filing requirement, if a sale is completed in May, the tax is due in June. Under the quarterly filing requirement, if a sale is completed between the months of April and June, the tax is due in July. Under the annual filing requirement, if a sale is completed any time during the calendar year, the tax would be due in January.
When dealing with products, the tax is due upon completion of the sale. Completion is defined as when the client takes possession of the merchandise and furnishings. It is also based on the location of the final destination for products or where the services will be rendered.
When determining the tax on the design services, completion of the sale occurs when the installation is completed. This means that when a client gives you a deposit or retainer payment, the sales tax is not due at the time because the funds have not yet been earned—the project is still in motion. But once the final payment is made and the project is complete, the sales tax will be due.
How Do You Pay Sales Tax?
Sales tax is typically regulated at the state level, but don’t be alarmed if a county tax is also imposed. Most states allow you to remit sales tax through their website. This is a relatively simple and easy process when dealing with fewer than three jurisdictions.
If you are selling goods and services outside of the state where your business is registered, the process of going to each website, as well as keeping up with the separate laws and regulations, can become a bit complicated and overwhelming. We typically recommend that clients who pay sales tax to more than three jurisdictions should use a tax payment service, such as Avalara, that has a built-in process to ensure businesses stay in compliance and the taxes are paid on time.
When paying your sales tax, don’t assume the rate is the same as the sales tax imposed on retail. Check with your jurisdiction to verify your rate. Some states charge a different rate for services sales tax than they do for retail sales tax. Not charging the correct sales tax can cost you money.
Sales tax is a requirement for interior designers, and the accounting angle can be cumbersome. Working with an accountant or tax payment service can take some of the burden out of staying compliant.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Sherrell T. Martin is the founder, CEO, and cloud accountant at Nitram Financial Solutions, a financial management and consulting practice. She helps interior designers with managing the financial health of their businesses so they can find the money leaks, increase their cash flow, and maximize their profits.
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