State Sales Taxes Can Be a Problem
If you never intend on selling your coin laundry, pay no attention to this article. However, if a sale is somewhere in your laundry’s future, read on.
In California, and elsewhere, the sales tax people have ordered the licensed escrow companies not to allow a laundry sale to close without the tax board’s written clearance. They are seeking uncollected taxes, where laundry owners have purchased vend items, sodas and snacks from retail sources. If they have only paid tax on their purchase price and not on the final retail sales price from the machines, they owe the government money.
The crux of the problem is that coin laundry owners sometimes purchase vend supplies from companies that are not authorized by the state sales tax people to collect the eventual retail sales tax at the time the vend items are purchased by the laundry owner.
As an example, if the laundry bought sodas at discount stores, they paid tax, in affect, on the wholesale price. Regulations are that tax is to be collected on the retail price, not the wholesale price.
So, the tax people are able to charge for the difference between what tax should have been on the soda, from the machine, and subtract the tax paid at the time the soda was purchased. They then are able to charge for the difference, plus interest and penalties.
Such a small amount should be no problem, right? WRONG!
As much as the financial pain can be, paperwork and delay in closing the sale can be far worse. In a number of cases the sale was delayed so long, it fell through.
After the sales tax audit people figure any difference, they have the right to add interest and penalties. The frightening thing is that they can go back and charge for that difference, and interest and penalty for each and every year that the laundry seller actually owned that coin laundry business.
In one California case, they reportedly went back a total of eight years. It was a ton of money, plus it postponed the eventual sale by four months, not to mention the time it took the seller to scramble for records and bring his sales tax reports current.
In that case the owner bought everything he vended as if he was trying to avoid sales tax. In the end, he found out that it wasn’t worth it.
What’s the Law Have To Say?
Most owners of service businesses, like coin laundries, car washes and cleaners, avoid having a resale tax permit like the plague. Why? It has been widely believed that those holding permits will pay tax on the total value of their business equipment when they sell.
Regulation 1595, governing Sales & Use taxes in California states, “A Laundromat may sell soap to its customers. If any of these businesses are sold, tax would apply only to the gross receipts from the tangible personal property held or used in the selling activity.”
In other words, when you sell a laundry, sales tax is due only on the value of the vending equipment, but not on the value of the laundry machines.
The code exempts service businesses from sales tax. Thus coin laundries are not required to have a tax permit, unless they are involved in the incidental sale of taxable items such as soap vending, candy or soft drinks.
The tax people know that almost every coin laundry has a soap vendor, and many also have drink and candy machines. According to sales tax law, every laundry should therefore either:
a) Have a resale permit and collect taxes on these vended items, or
b) Should prepay based on their retail price where they buy their vend item.
So, if your laundry sells detergents or sodas, you either pay the final retail tax when and where you buy them, or else apply to the State Board of Equalization for a tax permit so that you can remit tax along with the required periodic tax form.
Except for Washington, and the few states that have no sales tax, most western states are similar to California regarding tax on sale of a service business. Only value of vending machines for sodas, vend supplies and snacks are subject to tax as part of the sale of any coin operated laundry.
How to Stay Out Of Sales Tax Trouble.
Most established laundry vend product distributors are authorized to pre-collect taxes, as are most soft drink bottlers. If they have not been, you should consider changing suppliers to head off trouble.
Warning: Not everyone selling vend items has State Tax Board approval to pre-collect sales taxes. Be certain where you stand. Ask! Don’t just assume they are approved. The risk is too great. Ask your supplier if they are a qualified 1595 vendor.
If the supplier is not so qualified, apply for a sales tax permit and do the quarterly or more frequent reports required. Most suggest that the license not be in the laundry name. If your laundry is sold, you also sell vending machines to the same buyer, but there will be no sales tax hold up for the laundry.
Whatever course you follow, be sure to keep all receipts, so you can prove that the tax was collected properly. By that, we mean from day one to the close of the escrow when you sell. Take no chances.
What is Sales Tax Procedure at sale?
When a laundry is sold, the escrow holder must obtain a clearance from the local State Tax Board office to show there are no sales taxes due. If the laundry has a resale number, the local State sales tax office will be asked to sign off that the laundry is current with Sales and Use Taxes. If they can’t do that, it truly can be a laundry seller’s nightmare.
Date:-05/28/2011
By:-Admin
