Item Charge for Tax

muziclover

I have a client who wants to assign "Use" taxable item charges to their items so that both the item charge + tax amount is included in their item cost. Their version of NAV (which is partially modified) only assigns the item charge but not the applicable Use tax to the item cost.

Purchase Invoice Example:

Item = $100 * 6% tax = 106.00 Inventory/(100.00) AP/(6.00) Accrued Taxes
Item Charge = $20 * 6% = 21.20 Inventory/(20.00) AP/(1.20) Accrued Taxes
Item Cost in value entry = $126.00 (only charge gets assigned, not Use tax)
Inventory G/L account = $127.20

So basically, the Inventory account includes the both the item and item charges including tax but the item cost only includes the $106.00 (item + tax) and the item charge $20.00 (no tax).

Thoughts, suggestions?

bbrown

I'm not sure where you're posting from, but around here taxes are not an asset.

muziclover

That is my point .. I have never worked with a client who has had this requirement but according to what they are telling me, they need it to work this way.

Alex_Chow

Some clients want to include sales tax as part of their inventory. It's not common, but there are cases like this even in the US.

What we ended up doing is to allocate the sales tax using item charges.

muziclover

Alex, this is Use tax. How would you recommend we do the allocation? Thanks!

bbrown

We do something similar with one of our clients with their production related expenses. Their accounting firm was OK with it since the prduction and sale all happen within a day of each other. However, they noted that if the client was keepign the inventory on the books for an extended time period, this would likely not be accepable.

Of course, I'm just stating what their firm said. Ask someone else and you might get a different answer. That's why on this project, we got a sign-off by the accounting firm before proceeding.

muziclover

The problem I see with the allocation is that Use Tax does not calculate until an invoice is posted. Sales tax calculates upon release of the order, but Use tax does not. I'm not clear as to how you got this to work.

muziclover

Can anyone shed any light on this issue? One of the responders said they were able to do this but unfortunately, they have not explained how.

Thanks!

Alex_Chow

muziclover wrote:

The problem I see with the allocation is that Use Tax does not calculate until an invoice is posted. Sales tax calculates upon release of the order, but Use tax does not. I'm not clear as to how you got this to work.

My experience is mainly with sales tax, not use tax. But here's what I'm thinking you can do.

You will need to turn the use tax functionality off. Basically, add a item charge line for the tax so the tax can be accrued to your inventory. Then add another G/L line with a negative amount to balance out the item charge.

muziclover

Alex,

I see what you're saying, but here lies the issue: They want the Use Tax amount to roll into the Item Value Entry (cost). So basically, when they apply the Item Charge to the item, they're expecting that item's cost to increase by the item charge + Use Tax. I know, right? This doesn't make sense to me either.

I have asked this client to verify whether they need to track Use Tax on item charges because this is so out of the ordinary. I was just wondering if anyone has ever encountered this scenario or figured out a way to make it work.

Thanks

bbrown

I'm having a problem with the link between "use taxes" and inventory. What am I not seeing here? "Use tax" is usually to stuf like leases or rentals.

muziclover

I agree .. in all the years I have worked with inventory, never have I had a client add tax to their inventory items. Personally, I don't think they understand what they're doing, but I wanted to put this out there on the forum to see if anyone else has encountered this.

bbrown

A clearer and more detailed descripotion of the business process might be helpful. Sometimes our job is not to just do what the customer ask. But rather to guide and advise.

muziclover

Agreed, but I'm a Support Analyst, not a consultant. This process was setup by someone else.

Alex_Chow

muziclover wrote:

Alex,

I see what you're saying, but here lies the issue: They want the Use Tax amount to roll into the Item Value Entry (cost). So basically, when they apply the Item Charge to the item, they're expecting that item's cost to increase by the item charge + Use Tax. I know, right? This doesn't make sense to me either.

I have asked this client to verify whether they need to track Use Tax on item charges because this is so out of the ordinary. I was just wondering if anyone has ever encountered this scenario or figured out a way to make it work.

Thanks

If you apply the use tax amount (which will be manually calculated) using item charge, the inventory will have the proper tax amount applied to the item cost.

To balance out the additional tax amount from the item charge, you have to enter a G/L account with a negative Direct Unit Cost.

I would test this out and give the results to the CFO to see if he's okay with it. The problem I see is that you will book additional revenue at the time of the purchase invoice and the cost will only be relieved after the item is sold.

Alex_Chow

One thing you also want ask the client CFO is to make him draw out how he wants the G/L account posting, i.e. which account goes to where.

Once everyone is clear on the G/L postings, the setup will be self explanatory.

David_Singleton

Is this a US implementation? Some how to me it looks like someone in the company is confusing Sales Tax and VAT, and maybe saw a "use Tax" option that they thought maybe covered something. Maybe a Canadian or Australian company working in the US. Or vica versa, a US company doing business in a Vat+Sales Tax country.

I would say you need to follow Bbrown's advice and get a full description of the clients business procedures and until then just wait. I would be asking for a full set of "T" accounts.

Alex_Chow

bbrown wrote:

I'm having a problem with the link between "use taxes" and inventory. What am I not seeing here? "Use tax" is usually to stuf like leases or rentals.

Usually, when a vendor sells you something and they do not charge you sales tax when infact it should be sales taxable, the company that purchased the product will need to pay the use tax to the government.

bbrown

Alex Chow wrote:

bbrown wrote:

I'm having a problem with the link between "use taxes" and inventory. What am I not seeing here? "Use tax" is usually to stuf like leases or rentals.

Usually, when a vendor sells you something and they do not charge you sales tax when infact it should be sales taxable, the company that purchased the product will need to pay the use tax to the government.

If I'm classifying it as inventory, doesn't that imply that I intend to resell it? Therefore it's not taxable. A use tax would apply to stuff that I'm not reselling, liek equipement. But then those are not inventory.

muziclover

That has been my contention as well and I have discussed this with the client. While the vendor is not charging them sales tax, they apparently need to track Use Tax on re-sellable inventory items - - and - - they believe they need to add the Use Tax amount to the cost of the item. We had a candid discussion last week where I explained that I had never encountered this "Use Tax as part of Item Cost" scenario before, but that is apparently how they do business. This is how their inventory system was implemented. The issue arose when they discovered that item charges worked differently.

This is a US company doing business in the US.

I agree, none of this makes any sense which is why I posted the question. I do appreciate the feedback as I realize others now understand why I'm finding this odd.

My suggestion to the person who opened the support ticket was that he discuss the process with his accounting department. My concern is that he does not have the expertise to be making system changes.

David_Singleton

Alex Chow wrote:

bbrown wrote:

I'm having a problem with the link between "use taxes" and inventory. What am I not seeing here? "Use tax" is usually to stuf like leases or rentals.

Usually, when a vendor sells you something and they do not charge you sales tax when infact it should be sales taxable, the company that purchased the product will need to pay the use tax to the government.

In that case they are breaking the law by evading tax. Sales tax is based on the final sales price of the item, not the purchase price. So they are underpaying taxes.

David_Singleton

muziclover wrote:

That has been my contention as well and I have discussed this with the client. While the vendor is not charging them sales tax, they apparently need to track Use Tax on re-sellable inventory items - - and - - they believe they need to add the Use Tax amount to the cost of the item. We had a candid discussion last week where I explained that I had never encountered this "Use Tax as part of Item Cost" scenario before, but that is apparently how they do business. This is how their inventory system was implemented. The issue arose when they discovered that item charges worked differently.

This is a US company doing business in the US.

I agree, none of this makes any sense which is why I posted the question. I do appreciate the feedback as I realize others now understand why I'm finding this odd.

My suggestion to the person who opened the support ticket was that he discuss the process with his accounting department. My concern is that he does not have the expertise to be making system changes.

It sounds to me that they had a limitation on how their old system works that then became "business procedure". Maybe in the old system it was difficult to report this, and thus they never go caught out. The danger being that if they now change and pay tax properly the Tax authorities may notice the difference (and they monitor this stuff very closely) and will request an audit to find out what changed. During the audit they then find that for the last X years the company has been incorrectly reporting sales tax, and thus they get hit with huge fines.

Make sure you get a sign off on the entire procedure before touching this.

muziclover

That's good advice David,thanks. I have not heard back from this client since I pointed out that I didn't think his company was processing Use Tax transactions correctly and suggested he talk to his accounting department.

Thanks for all the feedback

Alex_Chow

None of us are CPAs, so we're not qualified to say what use tax is or is not. In addition, we're not qualified to to say if inventory cost should include use tax or not. That's up to the CFO and the CPA on whether he'll sign off on the tax return doing business a certain way or recording transactions in a certain way.

We do have a customer that has to incorporate sales tax as part of their inventory value. The reason that was explaned to me is because they sell the product at $0.00 price. They've asked the Board of Equalization and their CPA, and they both were in agreement.

I guess what I'm trying to say is that doing this for xx number of years, there are still strange and new things that we may encounter that we may not think qualifies as logical business sense, when in fact, it is.. (now I'm just rambling). :?

muziclover

That's interesting Alex .. just curious, but when you say "Sales tax" is built into their inventory cost, does that mean their vendors are charging sales tax (vs "Use Tax") on re-sellable items? That is new to me as I have only seen sales tax charged on expended items such as office supplies, etc.

Interesting topic ...

Thanks

Alex_Chow

Since they sell the items at $0.00, the BOE wants them to pay for the sales tax.

This is also applicable when you give out promotional items or give out free items to, for example, athletes you're sponsoring. In this case, they will need to pay use tax. Fortunately, this particualr customer does not require use tax to be part of their inventory cost.

Again, I'm not a CPA. It does seem logical sense since the state is cash straped and they're stepping up enforcement on sales taxes.

muziclover

You must be talking about CA .. I'm in NY, so I hear ya ;-)

bbrown

Use taxes are paid by the end consumer. Not the vendor. In the example above, the athlete is responsible for paying the use tax. Not the company that gave away the free item.

As another example, I live in a state with a 6.5% sales tax. I also happen to live within a short drive of a boarding state with no sales tax. I could drive up there and buy a new TV without payig any sales tax. However, technically, when I file my state income taxes I'm supposed to claim that purchase and submit the 6.5% use tax.

Alex_Chow

bbrown wrote:

Use taxes are paid by the end consumer. Not the vendor. In the example above, the athlete is responsible for paying the use tax. Not the company that gave away the free item.

As another example, I live in a state with a 6.5% sales tax. I also happen to live within a short drive of a boarding state with no sales tax. I could drive up there and buy a new TV without payig any sales tax. However, technically, when I file my state income taxes I'm supposed to claim that purchase and submit the 6.5% use tax.

I think CA has different tax requirements...

bbrown

Alex Chow wrote:

bbrown wrote:

Use taxes are paid by the end consumer. Not the vendor. In the example above, the athlete is responsible for paying the use tax. Not the company that gave away the free item.

As another example, I live in a state with a 6.5% sales tax. I also happen to live within a short drive of a boarding state with no sales tax. I could drive up there and buy a new TV without payig any sales tax. However, technically, when I file my state income taxes I'm supposed to claim that purchase and submit the 6.5% use tax.

I think CA has different tax requirements...

Quite likely, many states do.