Trying To Avoid Sales Taxes Can Create Big Problems

For the second month in a row, the News received a frantic phone call from one of our readers telling of their difficulty getting a clearance from the state sales tax people for the sale of their business. This month we were told the following story. He had owned his laundry for ten years, and finally sold it and went into escrow. The folks at the escrow company told him the state sales tax entity required him to get a sales tax number and to pay back sales taxes for the ten year period of his ownership. They would not settle for estimates, but needed to see all of his back invoices. In other words, they wanted proof for what he bought in the way of soap and vending supplies and needed to know what he sold them for. What a paper- work nightmare. Fortunately for the seller, all of the vended items he had purchased over the years were gotten from an ''Authorized Retailer''. A special type of recognized supplier who sells at wholesale to laundry owners, but collects sales tax on the eventual retail price of the vended items. With this information in hand, the laundry operator went to the sales tax people and had his sale approved and his sale closed escrow. In California, and elsewhere, the sales tax people have ordered licensed escrow companies not to allow a coin 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 wholesale. So, the tax people can 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 one recent case 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 make reports. In that case the owner bought everything he vended as if he was trying to avoid sales tax. In the end, he found out the hard way 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 coin laundry, sales tax is due only on the value of the vending equipment, but not on the value of the laundry''s 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 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 precollect sales taxes. Be certain where you stand. Ask! Don''t just assume they are approved. The risk is too great. 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 your laundry is sold, the escrow holder must obtain a clearance from the local State Tax Board office to show there are no taxes due. If you have a resale number, the State will be asked to sign off that you are current with Sales and Use taxes. If your laundry does not have a resale number, then you will be asked to identify the ''Approved Retailer'' you buy your vending items from. You also may be asked to produce copies of paid invoices to show that the tax was based on your actual retail vend price, even if you paid the wholesale price. If you can not produce such records, you may be audited, and have your escrow placed on hold pending conclusion of that audit. Such audits are demanding, both of a laundry owner''s time and their patience. Since sales tax audits are done for and at the convenience of the tax people, the sale of your laundry business could be on hold for quite some time. One that should have closed in early January 2007 is still waiting clearance as this is being written. Most laundry owners prepay the sales tax for their vending supplies at the supplier. That way, someone else is doing all the math and tax work, which makes the operators life a bit easier and less complicated. If you feel it is necessary to have a sales tax permit, consider setting it up under a different business name. That way, when you sell your coin laundry, you will make out two bills of sale. One will be for the laundry business itself, for which there will be no sales tax due. The other would be for the value of the vending machines in the laundry, and you would only pay tax based on that value. That too makes your life a lot less complicated. The News has these recommendations for coin laundry owners: 1. Always buy your detergent and other vend products through a supplier who is an ''approved retailer''. It''s really not worth the bother to have a resale permit. 2. Don''t assume your supplier is one of those retailers. Ask them to prove it. 3. Make sure the taxes they charge are based on the actual retail vend price of your vending machines. 4. Keep invoices showing the taxes paid on the vending items you buy. Be able to prove that the tax has been paid. 5. Don''t try to sneak items in without the tax being paid. The possible savings are so small, ''it ain''t worth the risk.'' 6. If you do want a resale permit, have it made out in a separate business name so that you don''t tie up a possible laundry sale in a tax audit. Honesty really is the best policy. You buy a coin laundry to make money while you own it and to profit as much as possible when you sell. Sales taxes really mean very little to the bottom line while you operate. Paying penalties or having an escrow delayed when you sell is just not necessary and can be avoided if you know about your sales tax obligations, and handle things correctly. It is good business to take advantage of every savings to make a profit while you operate your laundry. However, doing so at the risk of getting nailed for back sales tax plus interest and penalties just isn''t smart business at all.