Sales Tax Basics for Interior Designers and How To Get Set Up to Sell Trade
Updated April 2023
Now, this may be old hat for many of you, but if you have a newly established business or have been hesitant to sell trade because of the fear of sales tax, this post is for you!
If part of your revenue comes from the re-sale of goods (whether it be furniture, fabric, accessories, or cabinets and countertops), and you purchase those items from a to-the-trade vendor at net pricing, then everything in this post is critically important to you.
Sales tax (that we all pay every time we go shopping) is paid by the end-user of goods or merchandise. When you—as a designer—purchase goods and sell them to your clients, those clients are the end-user (not you) and therefore must pay sales tax to the state and sometimes also to a local jurisdiction (county or city) tax collecting agency. You collect the sales tax from the client and remit it to the state.
Let’s talk about three parts of this process:
Purchasing from a to-the-trade vendor.
Selling goods to the client (the end-user) and collecting sales tax.
Paying that sales tax to the state and local tax collecting agencies.
And, if this is new to you, be sure to join Design Business Foundations, where my team and I walk you through setting up your interior design business on solid footing from day one and provide expert 1:1 support.
01 | Purchasing Products from a To-the-Trade Vendor
When you purchase from a to-the-trade vendor, you do not pay sales tax at the time of purchase, as you are not the end-user of those goods. You typically purchase at a price that is lower than the MSRP (manufacturer’s suggested retail price), therefore, you have the opportunity to collect revenue when you sell those goods to your client at a mark-up from that lower (sometimes called net) price that you paid the vendor for the goods.
You can sell those goods to the client at any price you wish: either the MSRP, or some percentage of mark-up that you determine. To see my thoughts on the topic of how to determine your mark-up, and whether to disclose it to your client, read this post about why you SHOULD NOT call it a discount.
But, in order to qualify to make purchases from your vendors without paying sales tax, and at net pricing, you must obtain a sales tax permit for your business entity. In different states, this might alternately be called a resales license, sales tax license, seller’s permit, resale tax certificate, certificate of resale, tax identification number, sales tax exemption number, exemption certificate, or another similar-sounding term.
Fun, right?
In short, this sales tax exemption certificate/license/number gives you permission—as a representative of your business entity—to make purchases without paying sales tax to the seller (the to-the-trade vendor) at the time of purchase. It also allows you in turn to be a reseller of those goods – selling them to the end-user, your client, and collecting sales tax when you make that sale.
The way you obtain a sales tax exemption certificate/license/number is simply to go to the Department of Revenue website for the state in which you will be purchasing and selling goods, and find the location (usually in an Information for Businesses section) where you can apply. The application process can typically be completed online or may involve sending some paperwork through the mail.
Beware that having this sales tax exemption certificate/license/number comes with some responsibility. The state now knows that your business re-sells goods and collects sales tax, so you now need to report tax collected to the state on a regular basis. Just as a state or federal revenue service will be none-too-happy if you don’t file your personal income tax each April 15th, they also will track you down if you fail to report your sales tax activity!
Once you have this sales tax exemption certificate/license/number, you will keep it until you either close or modify your business (such as converting from a sole proprietorship to an LLC or S-Corp), and you will use the corresponding number for any non-sales tax purchasing from vendors, and all sales tax reporting of tax collected from end-users. Even though it may be called a license or certificate, these days, there is often no actual piece of paper issued by the state, typically just a corresponding number.
However, there is one more step after obtaining this sales tax exemption certificate/license/number from your state. You must also fill out a simple form, indicating that sales tax number, the first time you do business with any new vendor (the seller, in this case). That vendor (seller) will keep this completed form on file, and know that—because you have a sales tax exemption certificate/license/number, you will not pay sales tax when you make purchases. This form is called a Certificate of Exemption, or perhaps a Sales Tax Resale Certificate, or something similar depending on your state.
I know what you’re thinking! Doesn’t the name of the thing that allows me to make tax-exempt purchases and the form I use to report my tax-exempt number to new vendors sound an awful lot alike?!?!? Yes, the names of these two things can seem repetitive or redundant, depending on how your state chooses to name them. So confusing!
When you do business with a new vendor for the very first time, they likely may have blank copies of your state’s Certificate of Exemption for you to fill out. Or, you can go to your state’s Department of Revenue website and download and print a copy of the certificate, and fill it out in advance, or, you can use a form that is intended to be used in any state. You fill out the form, and the vendor keeps it on file.
This form varies just a bit from state to state, but the information you need to provide on it is fairly simple:
the name and address of the seller (the vendor whom you are purchasing from on a tax-exempt basis)
your business name and address (you will be the re-seller)
the reason you are purchasing as tax-exempt, which is that you are to be a seller (or reseller) of goods to your client
description of the items to be purchased for resale (typically you can say furniture and home goods)
and, the number from your state’s sales tax exemption certificate/license/number
02 | Selling To-the-Trade Goods to the Client & Collecting Sales Tax
Next up: Let’s talk about selling goods to the client (the end-user), and collecting sales tax.
It is critical to know three things, all of which can usually be easily found on your state’s Department of Revenue page:
Which goods and services are taxable in your state.
The rate of sales tax collected by your state, and additional amounts collected by county or city municipalities (other tax collecting agencies).
When the sales tax collected needs to be filed and paid.
Every state is different as to what is taxable. Many states do not tax professional services, but some may. That means that your fees (whether you are charging hourly fees, flat fees, or have some other type of fee structure) may or may not be taxable. When you invoice your client for design services, it is very important to know whether or not you will add sales tax to those design fees.
Likewise, sewing services, upholstery services, or other such services, as well as freight and delivery charges—that you may include in your invoicing—may or may not be taxable.
In some states, this may be more complicated. For instance, design fees related to layout and planning may be non-taxable, but design fees related to choosing and selling goods—such as shopping for carpet or furniture—may be taxable. In some situations, the fees for sewing draperies may be taxable, but the fees to hang them may not be, or vice versa. (This is why we highly recommend working with an accountant. Email me if you need a recommendation!).
The key is, check with your state’s Department of Revenue taxation page to fully understand the tax situation where you are doing business.
However, in all but 4 states which do not have state sales tax (Delaware, Montana, New Hampshire and Oregon) tangible goods—when you re-sell them to your client—will be taxable. That leads us to the next critical piece of information – knowing the rate for sales tax in your area.
In addition to a rate of tax that must be collected and paid to the state (state sales tax), there may additionally be a rate of tax that needs to be collected and paid to the county and/or to the city. Many state Department of Revenue websites have a zip code sales tax calculator. Enter the location where you will be doing business, and the calculator will give you the components of the tax rate.
An example would be:
7.00 % state sales tax
.50 % county sales tax
.25 % city sales tax
7.75% total sales tax to be collected on goods sold
Note that it is the location of your client (the buyer of the goods), not your location (say, where your design studio is located) that mandates the rate of tax. If the taxable items are received by the client at their place of residence, then enter your client’s home address zip code into a sales tax calculator to determine the sales tax rate that you should charge.
Once you know what to tax, and the tax rate, you can appropriately invoice your clients for the sales tax that you need to collect from them – at the time that you invoice them for goods and services. Virtually every state requires that tax be included as a separate line item on an invoice, and not added directly into the cost of a service or tangible goods item.
Fortunately, any good accounting software will assist with calculating the tax rate, and tracking the amounts to be appropriated to the various tax collectors (i.e.: state, county, city). I’ll share some of my favorite software programs for interior designers in an upcoming post.
03 | Remitting Sales Tax to the State
Finally: Now, don’t fall into the trap of counting that tax money collected as revenue!!!
It may be sitting in your business’s bank account, but it is not yours to keep!! You—after collecting tax from your clients—need to file a sales tax return (just like you file your own income tax return every April 15th) and pay the tax to the various tax collecting agencies. Late fees and failure-to-file fees are steep, and you do not want to pay them.
Check with your state’s Department of Revenue (business information section) to know what the filing deadlines are (it is likely not April 15th – what we all think of as Tax Day). And, check whether you are required to file annually (like income tax), quarterly, monthly, or even semi-monthly. Many states have monetary cut-offs for filing frequency: if sales tax collected is under this amount, you can file/pay annually; if between this amount and that amount – file/pay quarterly; if over this amount, file/pay monthly or semi-monthly.
Both the schedule to file/pay and the link for filing and paying electronically can be easily found on your state’s Department of Revenue website. Accounting software should make this process relatively painless. Remember that it is the sales tax exemption certificate/license/number that gives you the privilege of purchasing at wholesale (also called net) pricing. So it is certainly a necessary business process to collect, track, and pay sales tax.
If you’re ready to start setting up trade accounts and sourcing trade for your clients, be sure to read this post to learn all about using a receiving warehouse and join us in Design Business Foundations, where my team and I support you for six weeks through every step of building your new design business.
Disclaimer: I am not a tax attorney or tax accountant. What is described above are general guidelines and recommendations for sales tax collection and reporting. Please refer to information on your state’s Department of Revenue website, or consult with a tax accountant.
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