Resellers' Sales Tax on Purchases

April 13, 2006

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The following are some questions that commonly arise in regard to sales taxes for resellers, when they purchase goods:

Do I have to pay taxes for inventory I use for my own personal or business use ("internal consumption")? When you purchase inventory and use a resale certificate, you are agreeing to be responsible for paying and/or collecting sales or use taxes when the property is resold. Accordingly, if you or your business consumes inventory internally, states treat the internally consumed property as if it was sold. You will be treated as the consumer and be required to pay sales tax on the value of the property.

Do I have to pay taxes on inventory that I use as a demo? If your business uses a piece of inventory property for display or demonstration purposes ("demos"), no sales or use tax will be incurred. However, if you later sell or donate this property to charity, you will almost certainly be hit with sales or use taxes even if the sales price is discounted. Now, the question that you are probably asking yourself is, what is the sales amount I'm suppose to pay tax on? First, if the property is donated to charity, then its value for tax purposes should be what your business paid for it when it was put into inventory. Alternatively, if you are able to sell the demo property, then you should pay tax on the amount you would normally charge, less any discount you gave your customer for buying a "floor model."

As a cookware reseller, you use the Petty Docker 20-piece cookware set for demonstration purposes at the local shopping mall. After 3 months of subjecting the cookware to hundreds of omelets and pan fried steak demonstrations, you decide to donate the cookware to the local soup kitchen. At that time, you will be required to pay use tax on the value of the property when you bought the property.

On the other hand, if you sell the demo cookware to an interested customer at the cooking demonstration, then the value of the cookware for tax purposes should be the normal sales price less any discount for buying the cookware "used."