Mastering Sales Tax for Your Painting Business: A Guide

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution: while we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decision. This is Daniel, the founder of Bookkeeping for Painters.

This is Jonathan, advisor with Bookkeeping for Painters.

How's it going today, Jonathan?

Pretty good. How are you doing, Daniel?

Doing well. So today we're talking about a really sexy topic, sales tax. And, you know, some folks, you know, they never have to worry about this, you know, the whole time they're in business, where other folks, it can be like the bane of their existence. As a business owner, you definitely want to know what sales tax is, even if it doesn't apply to you. You just want to be prepared. And because if you happen to do, you know, work in a separate state that you don't usually do, you just need to be aware of this concept. And then of course, if you're in one of these states that has sales tax, you need to know it pretty well. And not just for compliance purposes, you know, making sure you don't get in trouble, but there's also some ways you can kind of use it to your advantage, use some of these laws to your advantage and actually save money in tax. So it's kind of a cool niche topic that I think can help folks out a lot by understanding it. So Today, I think we're going to go through, you know, what is sales tax? How do you collect it? What are some of the ways you might get in trouble? But how are some of— what are some of the things you can do to use it to your advantage? And then we'll talk about how you can get started with sales tax and how to track it. But first of all, hey, Jonathan, can you kind of walk us through, since you're kind of the subject matter expert on this topic, what is sales tax and how is it different from another type of tax?

Yeah, absolutely. So, you know, first thing, sales tax is a state and local tax, right? So you'll actually hear it referred to as SALT, state and local tax. You know, sales tax is imposed first at the state level in 45 of the 50 states. If you're lucky and you're in New Hampshire, Alaska, Oregon, Delaware, and Montana, then you're kind of lucky. You probably don't have to deal with this as much. But in those other 45 states, you have some sort of sales tax either at the state level, the county level, in many cases both. And so that's the bare bottom line is it is a state and local tax typically charged on purchases of what's called tangible personal property. Basically anything you can touch, feel, taste, and sometimes services. So it really depends on the local level as we'll dive into.

Yeah, and I know for most painting businesses, you know, they're doing a service, and you know, you got sales tax when you go to the grocery store. You know, when you're purchasing your Mountain Dew, there's a sales tax on it. Everyone pretty much knows that. But in most cases, you know, in most states, like you were saying, but you know, services, you know, if you're a painting business, you're providing services, a lot of states don't don't require you to tax your services, but some of them do. So it's a little confusing. And so what you were saying is, so it sounds like some states, they classify when you do provide services that improve tangible property, tangible personal property, you might have to actually charge your customer when you paint their house, you might actually have to tack on some sales tax, whether that be for the service or maybe for the product depending on the state. Is that right?

That's right, yeah. And you know, a good test, a good quick little litmus test would be for painters who are, you know, buying paint from Sherwin-Williams, for example. Does Sherwin-Williams charge you sales tax when you buy that paint, right? So that's one litmus test as far as whether or not tangible personal property is taxable. But, you know, every state is different. Some states will exempt it. Typically speaking, all states and their laws are written in a way that everything is taxable. And then there's exemptions that allow certain things to not be taxable. And so it really depends on the state diving in to determine. Texas is a really good example of things where it gets a little bit iffy. They have exempted residential, but in terms of commercial properties, those services are taxable. And so, you know, it really just kind of depends on the state you're in. But yeah, it really gets kind of questionable and very difficult to navigate when you're a service contractor, just like painting here.

Yeah. And that rule of thumb that you're saying, if you go to Sherwin-Williams and you buy some paint, if you don't get charged sales tax, what does that mean for you?

Typically speaking, if you have not already given them some sort of reason to not charge you for, you know, there's resale certificates, all that we'll cover later. But, you know, if they're not charging you sales tax on the paint, then there's a reason why. It's possibly that the state has already exempted that because it's typically going into real property or something of that nature. But there's a reason why Sherman Williams is not charging you sales tax on that paint. And so that's probably— you probably already know why if you're in that state, but that's a great litmus test because that is a tangible personal property. Whether or not it's getting incorporated into real property is a different issue. But if you're not getting charged at that first level, then you're probably pretty safe that you're not charging your customers already.

Okay. Cool. So, so sales tax, it's something you got to potentially charge on your services and sometimes on your product, but you got to know your state rules is basically the bottom line for this. And this I think is especially true for folks that live close to like a border, especially like if you live on the border of Oregon and Washington, you might do some work in Oregon and then you also might drop down and do some some work in some Washington. So really understanding both states is super important, especially in that case, because one state doesn't worry about taxes on services while the other one, everything's, you know, taxed on services. So, uh, could you talk a little bit about that kind of situation?

Yeah, absolutely. And so that's the, you know, these are, as we mentioned earlier, these are state and local taxes. And so The bottom line here is this is a tax that's due from the customer, right? The person who has the end is using that product or using that taxable item. That's who owes the tax. But the states look at you as a business owner and say, we can't really go to every single client or every single homeowner and audit them. And so they begin to look at businesses for audit purposes and say, are you helping us basically claim this tax and get this tax. And so it's really important for every state you're in, every state you operate, even if it's just one job, that is in many times enough to consider to create what's called nexus. There are two types of forms of nexus, but that's what the government's called them, and it's physical and economic nexus. And so this is why you see There was big issues with Amazon back in the '90s about whether or not they were charging sales tax. And sometimes websites will not charge you sales tax. That gets into a whole nother area of what's called use tax. But, you know, the bottom line here is that you really need to know when you go into another state, another county even, what are those laws? What are the state tax laws for that particular area that you're in? Because counties have their own laws. And even just crossing county lines could mean one time it's taxable and one time it's not. And so it's really an area of importance to really kind of get in. But if you're doing things across state or county borders, then it's really important to kind of look at what are those tax rules there, because as soon as you cross the border, they're going to say, hey, you actually should have been collecting sales tax all along.

Yeah, you definitely need to pay attention to this because like you said, you're kind of, as the business owner, on the hook for these sales taxes. So in the past, we were— started working with this painting business out of Washington. They realized that they should have been collecting sales tax for like several years, and it was a significant emotional event to find out how much money they were going to have to owe to backpay all the sales tax that they didn't charge the customer. So they didn't collect from the customer. And so, yeah, definitely don't want to be in that situation where you're having to go back in for years and pay that tax bill because it's not pretty.

Yeah, it's, you know, it's bad enough paying taxes, but it's even worse when you have to pay somebody else's taxes. And bottom line, that's what sales and use tax is. It's oftentimes tax that was owed by somebody else that you should have gotten from them. And now it's too late, right? After the transaction's done, you can't go back and collect from them. But now you're going to pay tens of thousands of dollars oftentimes to pay for taxes that you could have been collecting all along.

Yeah, that's— it's rough. But the good news is it's not all gloom and doom. You know, there are some ways that you can actually use these state rules to your advantage and actually save money because of these, these rules. Could you, could you enlighten us on some of those topics?

Yeah, absolutely. So we were actually just working with a client recently out of California. You know, there are a couple states that, you know, don't allow this. You know, Florida and Washington are one of them. But, you know, basically the government kind of looks at you as either a contractor who is providing a lump sum contract or a time and material contract. There's also cost plus. Those are kind of more of the time and material. But basically they look at you in one of those two ways. And it's whether or not you are— if you're a lump sum, how they look at you as a service provider and you are the owner and person who uses the tangible personal property. So you're the person at the end of the day who's using the paint. And so therefore you owe sales tax on that. That's why Sherwin-Williams is charging you for sales tax when you go in and buy the paint. However, if you look at time and material contracts, what you're doing is you're separating your time for your skill, your labor, and services of installing paint. And that's essentially how the government looks at it, is you're an installer of the paint, and the paint is the product that you are selling. But the real thing is you are a service provider of that installation. And so when you begin to separate your, invoices and your contracts into time and material. In certain states like California and Texas, you can, you can file for a resale certificate, which allows you to go to places like Sherwin-Williams, hand this resale certificate, and you won't pay tax on the paint. And on your invoice, you'll be able to separate that material and charge your customer for that, that paint. And now that becomes a separate item. Even if services are not taxable, the tangible personal property of the paint is, and that would allow you to pass that cost on to the client. All things staying the same, your pricing stays the same, all of that. Now you've actually saved on the sales tax that you were paying earlier and now passing it on to your customer who is going to pay that, you know. So that's one advantage of, of those states that allow those resale certificates. But the other one, the really caveat to note here is that this is only something that you would put into a client's home. So make sure you're not giving it to Home Depot or any other stores for paintbrushes or those sort of things, unless it really is, you know, something that you were basically selling to them. But basically paintbrushes would be considered something you would use, whereas the paint is something that they are using up in their home. And so basically you're just becoming a Sherwin-Williams to them. And that is even if you mark up the price of the paint, it's just whatever you sell the paint for.

Nice. So this is, this is huge because basically you're saying in certain states, like examples being California and Texas, if you separate out your service from your paint and, and you've set up that resale, you get that reseller certificate from your state, you don't have to pay tax on the paint that you buy, but then you charge the customer that tax effectively, you know, you don't pay tax, but you collect it from your customer. And that can save you because in California, the sales tax is around 9% or so. So you're basically saving 9% of your materials is a savings to you. 'cause you don't change your prices, you leave your prices the same. I mean, I guess you could pass up savings onto your customer, but this, if you want to actually save money, you know, that, that's, you know, 9% of your materials. And if you're doing $1 million in, in revenue a year and your, your paint materials is around 15% of your, of your costs. So that's like $150,000. And, and so when you, realize a 10% savings on $150,000, you're saving, you know, $15,000 a year. That's just going straight in your pocket, basically.

Yep. All for just adding one item to your invoice at the end of the day, right?

Yeah, that's, that's awesome. So that one— so if you live in California or Texas, or just check your local state laws, um, you might be able to incorporate that and put an extra, you know, tens of thousands of dollars in your pocket per year depending on how much volume you're doing. All right. That's awesome. All right. So let's say someone, whoever's listening right now, they, they're like, oh, I'm either starting up my business or I'm about to do some work in Washington, or I want to look into this reseller thing. How do folks get started with sales tax?

Yeah. So I think the first, the first thing is always to go to your state's basically comptroller's website for this. Every single state has some kind of guidance when it comes to sales and use tax. It's such a complicated topic. Many states even have guidance for contractors in particular. Some may have it all the way down to the painter level. At the end of the day, they will give you some brief guidance on it. They're not going to give you those tax saving strategies, tax saving strategies, but they will give you some quick guidance on it, what to do, how to file. So, you know, at the end of the day, you need a sales tax ID if you don't already have one. You know, in California, it's a seller's permit, but you'll have to kind of file with the government for those things and get your systems set up. QuickBooks is a good example with the software that can track your sales tax. And so you want to be able to go in and make sure that you are not only collecting it, but tracking it properly, because once you collect it, It becomes a really big issue if you do not pay it. The state will come after you and they consider that their money and it is their money. And so if you do not remit it on time, that is a big issue. But ultimately, go to your state's website. They have a lot of guidance. And at the end of the day, there are specialists out there that, that do this from a consulting perspective. But also you can just call the state. You can even write them letters. They will respond to your specific situation. And a lot of times they encourage that. To write them directly, ask them very specific questions, and they'll give you guidance for your specific business. So that's another option as well.

Yeah. And if anybody's listening that's had experience with calling the IRS and trying to get a hold of them, it's terrible. Like, if you ever have to do that, you know, try any other means. But this is completely different when you call it— call your state. They're usually there as long as you don't call during lunchtime and someone will pick up and you can talk to somebody pretty easily. So calling your state is actually a lot easier than trying to call a federal agency. So especially the IRS. So that is definitely some good advice. If you're not sure, just, just you can't figure it out on the website, just call and someone will probably be able to walk you through it over the phone. And then you mentioned QuickBooks Online. That's, that's a great way to track how much you owe in QuickBooks Online. But okay, if you're tracking it in QuickBooks Online, you get it set up correctly so you know how much you're going to have to pay in sales tax each period that it's owed. What's usually the way to pay it? What do folks have to do for that?

Yeah, so most states have a quarterly filing. Some states will give you literal coupons, paper coupons. You can file it that way. Almost all states have the ability to file on their website. So once you're registered, you basically have an online profile. You can go in and pay it directly that way. But basically once a quarter, you're going to have to go in and fill out a form. You'll, you'll have all the information from your accounting system, or at least you should with a good accounting system, and you'll kind of just go through and say, Here's the sales tax collected. They'll ask you how much you, you know, collected in different counties, perhaps. And so all of the systems, when they're set up right, should track all this, make it really easy. That form is super simple to fill out at that point. And then you submit payment, whether that's in a check format or drawing directly from your bank. And so all the states are different, but basically you pay directly to the state and then they are the ones who will remit to the individual counties within the state.

Awesome. Well, I'd love to hear your thoughts on this topic. If you're listening out there and if you have any questions about sales tax, feel free to go to Facebook and type in Grow Your Painting Business and join our private Facebook group and join the conversation. What has your experience been with sales tax? Maybe you've done the you've got a reseller permit and you've implemented that in your business. Love to hear about what kind of success you've seen doing that and what savings you've seen. And with that, I'd like to sign off here and we will see you next week.