Thursday, January 20, 2011

Sales & Use Tax ID numbers

This information applies to people selling handmade jewelry within North Carolina. I am not a tax professional. This information was obtained from the NCDOR website, and from conversations with NCDOR employees prior to January 2011. All information is subject to change. It is your responsibility to make sure you are operating within all current and applicable tax laws with regards to your situation. For more information, call the North Carolina Department of Revenue (NCDOR) toll free at 1-877-252-3052.

If you sell handmade jewelry within the state of North Carolina, by law you should have a sales and use tax ID number, and collect and remit sales tax.

It doesn't matter how much you sell, or if you sell for profit, fun or charity. It doesn't matter whether you sell via the internet, craft shows, friends and co-workers, or the flea market. Even if you don't make enough money to claim it on your Federal income tax, you are still required by law to collect and remit sales tax on all sales of tangible property transacted within the state.

"But what if I only sell a few things a year, to my friends?" 

If making jewelry is only a past-time, you are not claiming any profit or losses on your income tax, and if you sell only a couple of pieces a year to friends, you might be thinking, "Who's going to know the difference?" There are many casual hobbyists who gift or wear their handmade jewelry and very rarely sell. Selling might only occur when a friend says, "That's beautiful, can I pay you to make one for me?" Labor is not taxable. So, if your friend buys the beads and pays you to make the item, sales tax is not due.

But, I've met several people who stretch that "it's only a hobby" excuse a bit thin. It may have begun as a hobby, but if you are selling at the flea market, if you are selling more than a couple of pieces a year, if you are on Etsy... heck, if you're here reading this blog about selling your jewelry ... you're in business, as far as the North Carolina Department of Revenue is concerned, and you should be collecting sales tax.

Willful failure to remit sales tax is a misdemeanor, under state law. It might be a "hobby" as far as the IRS is concerned and you're only breaking even in your profits and losses. But as far as the NCDOR is concerned, you should be collecting and remitting the sales tax on every sale of tangible property within the state.

Keep in mind, Sales Tax and Income Tax are two different things. YOU pay Income Tax, which is based on your earnings. The BUYER pays Sales Tax, based on the cost of the item -- you just collect it and pass it along to the NCDOR. 

How to get a tax ID number

Unlike a business license or home occupation use permit, obtaining a tax ID number is free. To obtain one, submit a completed Business Registration Application, Form NC-BR.  

Form NC-BR and other business forms are available online here.

You do not need a business name or a business license (the latter may be required by your county or city municipality, but the NCDOR won't ask for it). You'll just need your legal name, social security number, phone number, address and a guess-timate of your projected sales.

File every quarter

Once you have your tax ID number, you must file every quarter, whether you have sales or not, for as long as you remain in business -- which is defined as having at least one sales tax transaction every 18 filing periods.

Your filing period will probably be quarterly (every 3 months). Businesses only file monthly if they collect sales taxes exceeding $100 every month (that's sales tax of more than $100, not gross receipts of more than $100). That won't apply to you unless you're selling thousands of dollars of jewelry within the state each year.

Put a reminder on your calendar for every January 1, April 1, July 1, and October 1, so you won't forget to file. Filing takes only a few minutes, and you may file and submit sales and use taxes online. If you have not had any sales within that quarter, select "zero tax due."

Don't pay sales tax on materials

A benefit of having the state tax ID number is that it allows you to purchase jewelry-making components without paying NC sales tax. NCDOR wants to collect sales tax on the finished item, on the assumption that it will generally have a higher value than the sum of its parts and thus garner a higher amount of tax revenue.

In order to use this benefit, you must provide your NC suppliers with a Certficate of Exemption E-595E. Most craft and bead stores will accept these, but some will not -- and they are not required to accept them. If you want to purchase materials from someone who will not give you a tax exemption, you'll have to pay the sales tax and write that off as a cost of doing business.

The only tax exempt items are components -- things such as beads, string and wire -- which will become part of the finished jewelry. Tools -- pliers, ring mandrels, butane torches -- are not tax exempt. If you happen to buy tax-exempt tools along with your components, you will have to pay the Use Tax on those tools.

Use Tax

Use Tax is paid at the same rate as Sales Tax, but it's applied to items used within NC, not items sold within NC. For example, if you buy a pair of round-nosed jewelry pliers or a ring mandrel on eBay, it is shipped to you from Colorado, and you are not charged any sales tax, you will owe Use Tax to the state of NC.

The Use Tax for business-related items should be filed quarterly on Form E-500, the same form you use to file the sales taxes you collected. It is not filed with your state income taxes. The Use Tax filed on your state income taxes will be the Use Tax you are paying for non-business related purchases -- such as children's books on Amazon or Netflix services.

Your out-of-state sales are exempt from NC sales tax

Sales made to residents living outside of NC are NOT taxed if they are shipped to your customers by "common carrier" (UPS, FedEx or the post office). Sales taxes are only collected and filed on sales transacted within North Carolina. If the customer buys it from you face-to-face at a craft show, sales tax should be collected at the point of sale. If they buy it from you via the internet and you are shipping it to them at a NC address, sales tax should be collected.

You are not required to collect or file Sales Tax for any other state. So, for example, if you sell something to someone in California, you would not collect NC Sales Tax, nor would you collect California Sales Tax. It is the buyer's responsibility to file the California Use Tax.  

Charity sales are (usually) not exempt

If you are selling jewelry for charity, or at a charity event, you must still collect and file sales tax, even if all proceeds are going to charity. I am aware that there are charitable organizations and fund-raisers which may not be in compliance. I am not a legal counsel, and I cannot speak to the practices of every individual non-profit in the state, I'm just telling you what it says at the NCDOR.

See Section 17 of the NCDOR. Sales and Use Technical Bulletins, specifically EXEMPT SALES, TAXABLE SALES AND PURCHASES BY NONPROFIT ENTITIES and RETAIL SALES BY CLUBS, LODGES, ASSOCIATIONS, ETC.

Flea market sellers not exempt

The NCDOR website says "Flea market vendors must obtain a Certificate of Registration (fill out form NC-BR and get a tax ID number) and it must be posted at their location." If you are selling handmade jewelry (not your used, unwanted jeans and old VCR tapes!) at a flea market or yard sale without collecting sales tax, I recommend you contact the NCDOR for more information.

For additional information

NCDOR FAQ about sales and use taxes

NCDOR "Taxpayer Self-Help" page

A small biz overview of Sales and Use Taxes





Jen Hilton makes one-of-a-kind jewelry sold through her website JLHJewelry.com. She is the founder of the Triangle Jewelry Makers and is featured in the books "Steampunk Style Jewelry: Victorian, Fantasy, and Mechanical Necklaces, Bracelets, and Earrings" and "1000 Steampunk Creations: Neo-Victorian Fashion, Gear, and Art" available at Amazon and other booksellers.

2 comments:

  1. I had a lot of questions about starting my accessories business in NC. This post was soooo helpful in answering specific questions about taxes on handmade items. Thank You!

    ReplyDelete
  2. ha i needed this! filing 3Q now.

    ReplyDelete