Have your or your clients ever paid tax on purchases that were resold prior to use? Have you known anybody who purchased a service business and paid tax on the furniture and equipment acquired?
The following are two real life war stories that came my way this month:
In the first case, a food distributor was paying tax on their packaging materials. By way of background, persons who place contents into a nonreturnable container and sell the entire package along with the container, may purchase the container for resale. The purchaser of these containers, however, was unaware of this rule and erroneously paid sales tax reimbursement to the California seller. This tax over the past three years, added up to thousands of dollars.
After becoming aware of this situation, the purchaser filed a claim for refund for tax paid purchases resold. You may have noticed that this is one of the deductions on the sales tax return (form BT401-A Line 10(b)). The state responded by saying that a tax paid purchase resold credit may only be taken as an offset to taxable sales. Since the were no taxable sales in this case (in fact, the seller did not even have or need a sellers permit) the state refused to act on the claim. Moreover, they took the position that since the purchaser had no standing and they were not entitled to any appeals rights.
Regulation 1701 allows a refund to the purchaser for tax paid purchases when tax is paid through error with the respect to the purchase price of property purchased for resale in the regular course of business. It doesn’t appear the state has any legal basis to assert their position that this credit is only available in the case to offset taxable sales. We are continuing our correspondence with the state and will keep you abreast of any new developments. They also mentioned the fact that the only person entitled to file a claim for refund is the seller since it is a sales tax transaction. If the seller erroneously charged sales tax, I would have to agree with the state. However, since the purchaser did not issue an exemption certificate nor a resale certificate, the seller was required to treat this as a taxable sale. Since both resale certificates and exemption certificates must be taken on a timely basis, there is no basis for the retailer, in this case, to file a refund. Therefore, in my opinion Regulation 1701 applies and the purchaser should be granted a tax paid credit.
In a different case also brought to my attention this month, a tax practitioner purchased a tax practice and erroneously paid sales tax reimbursement to the seller on the sale of the furniture and equipment. After becoming aware of the occasional sale rule, the purchaser filed a claim for refund. In this case, the purchaser is not entitled to a tax paid purchase resold credit because the tangible property in question is not resold prior to use. The proper place for a refund is with the seller and only the seller can file a claim for refund. However, the purchaser waited two years and nine months after the purchase before filing the claim for refund. By the time state responded and made him aware of the fact that the seller must file the claim, the three year statue had expired and it was too late. This seems to be an injustice, but in this case, the state is legally correct.
A word of advice for construction contractors. Construction contractors installing materials on a lump sum basis are liable for the tax on the cost of these materials. Often times contractors purchase all materials tax paid but occasionally have sales that are not installed. If these sales are for resale, it would generate a negative sales tax return. The tax paid on the purchases resold generates a credit with no taxable sales as an offset. If the state’s position held true, there would be no refunds allowed for contractors given this scenario. However, this has not been my experience. I have contractors file returns such as this occasionally, and are refunded the money. Again, another inconsistency with the interpretation of esoteric sales and use tax laws and regulations. Sales tax consultants should be used to avoid such inequities.