On the other hand, North Carolina allows dealers to calculate use tax on appliances in a lump sum contract, but only if the firm does most of its business in remodeling. If the majority of a company’s kitchens and baths go into new houses, North Carolina requires the firm to use two contracts. The first is for the sale of materials, so a 7% sales tax applies on that total. The second is for the installation, much like what they require of flooring stores.
A simple comparison between Use Tax and Sales Tax on the same project reveals that your client would pay about the same overall price regardless of which calculation procedure is applied. The main difference is that your firm becomes a winner in the sense that it is picking up dollars for profit that would ordinarily be paid to the state in sales tax.
In the example shown in Figure 1, where the objective is a 50% Gross Profit, those extra gross profit dollars equal $1,596.
Appropriate Action Plan
When it comes to use tax and sales tax, there’s no doubt that many states have quirky applications or stipulations written into their tax codes. Since the profit opportunity in marking up use tax is considerable, it would behoove kitchen design firm owners who aren’t earning these profit dollars now to do a little homework. Remember, you are likely to run across a number of interpretations depending upon to whom you speak within the state tax department.
If possible, get a letter from the state tax office that confirms how your firm should be collecting the tax in your contracts. That way, when auditors target small businesspeople – in a year where there is a significant budget shortfall – from whom to collect underpaid sales taxes, you can provide proof that your firm has been collecting taxes in compliance with official state guidelines.