You may have heard about it. You may be doing it. Or maybe it passed you by and you’ve been entirely missing the opportunity. If so, you have been missing out on potentially a lot of money.
The question is, are you collecting and paying “sales tax” on the products you sell and install? Meaning, are you always calculating the tax you charge and pay on the “sales price” of the job, which in many states includes the delivery and installation charge?
If so, you’re missing out on probably the easiest way to be more competitive and profitable.
Here’s the deal
In most states the law provides that a sale of materials, such as cabinets and related products, that are sold AND INSTALLED to become a component of “real property” (i.e. a house – new OR existing) constitutes what is called a “performance contract” or “capital improvement”. A performance contract is where a consumer (or builder/contractor) is paying the dealer or company to provide goods AND INSTALL THEM (and they become part of the real property). “Install” being the key ingredient to constitute a performance contract. If you do NOT install the products, then yes, it’s just a typical retail sale.
When you install, consumers aren’t showing up and purchasing retail goods and leaving with them on their truck. They’re paying you to complete a portion of their real property with goods and services. This scenario constitutes a performance contract instead of a “retail sale” where you would have to charge “sales tax”.
Well, for a performance contract, you don’t collect and pay retail “sales tax” on your full sales price. Retail sales tax is what many dealers are collecting and paying currently (even for installed sales), and it is calculated on the total SALES PRICE of the goods (to the consumer), including delivery and installation in many states. For a performance contract, you calculate the tax on the COST of the goods you purchase to complete the performance contract, and that’s the tax you pay. This is also commonly referred to as “Use Tax”. It’s legal, ethical AND what you’re SUPPOSED to do (IF you’re in a state that has this part of their tax law).
What’s the Difference?
Here’s a quick sample of what the difference is between the 2 methods and an estimate of the potential gains by doing performance contracts and paying use tax instead of sales tax.
Let’s say we have a customer that is willing to pay $25,000 for their kitchen job. Check out the difference between a sales tax model and a use tax model.
So here you see that by doing nothing more than adopting the performance tax method of accounting for the sale, we added MORE THAN 2% POINTS TO MARGIN AND GAINED $560! (Sorry for yelling, but this is significant for doing basically nothing).
This means that for every $1 Million in sales of these types of jobs you would put $22,400 in your pocket.
OR – you could sell your jobs cheaper and be more competitive if you didn’t want to keep the difference for yourself.
So what’s the catch? Well there is one thing. You need a method to calculate and PAY the Use Tax. Most dealers pay the tax % of their cost of goods sold for installed jobs. BUT if you do “retail” sales (where you pay SALES TAX) also, you’ll need to keep both tax liability amounts straight. All that means is just an accounting process to make sure you’re paying the correct amounts.
I don’t believe there is any easier way in the market today to make such an immediate impact on your bottom line. It baffles my mind why more dealers don’t do it. I think it’s because they just don’t know about it.
Check your local tax laws and consult with your tax adviser to confirm these savings can be had in the states where you operate, or to see if there are specific exceptions in your area.