By Karen E. Klein Q: I've recently started a jewelry design and manufacturing business. I expect to ship my first batch of merchandise to a retail store in a few weeks. Do I collect sales tax on the merchandise, or do I need to get a tax ID number from the store owner?
-- K.F., Garrison, N.Y.
A: Good thing you asked about this before your first sale. Entrepreneurs are often so eager to plunge into business that they neglect the tedious but necessary steps involved in establishing their companies legally. Skipping those steps could expose you to unnecessary tax liability and penalties. So slow down for a couple of days, get your paperwork in order, and take the time to understand how your business will operate in regard to taxes.
We'll discuss your sales tax obligations, but it's worth your time and money to also meet with an accountant or attorney experienced in local business startups. He or she can help you think through several other crucial issues, such as which business structure (sole proprietorship, limited liability company, corporation) will best fit your situation.
NO TAX FOR YOU. Your first order of business: applying for a federal tax identification number for your company. Strictly speaking, if you're going to establish as a sole proprietor or LLC, you don't have to get a federal tax ID, says Alan E. Weiner, a CPA at Holtz Rubenstein Reminick in Melville, N.Y. But "you should apply for one anyway, so that your Social Security number does not have to be used if you need to issue 1099s or other documents." If you're setting up your company as a corporation, you will have to apply for the federal ID number anyway. The IRS allows you to do this online.
Now, to answer your question: Since you're selling your jewelry to the retailer for resale -- to consumers who will pay sales tax -- you do not charge sales tax on your transaction. You must, however, obtain a resale certificate (Form ST-120) from the store owner. Because you're based in New York, you can view Form ST-120 and the others mentioned here at the New York State Taxation & Finance Dept.'s Web site.
A resale certificate attests to the reason you collected no tax on a sale, and it'll come in handy if you're audited. Attach the certificate to the sales invoice or other evidence of sale that you retain as part of your records, and keep it for at least three years.
CRUCIAL NUMBER. Before worrying about a resale certificate, however, you must register as a vendor with the New York State Sales Tax Bureau. It will issue a Certificate of Authority allowing you to issue or accept most New York State sales tax exemption documents, says Lawrence Israeloff, a CPA at Feldman, Meinberg & Co. in Syosset, N.Y.
"If you are required to register as a vendor but fail to do so, and you engage in business without having obtained a valid Certificate of Authority, you will be subject to a penalty. The maximum penalty for engaging in business without obtaining a valid [certificate] is $10,000, imposed at the rate of up to $500 for the first day business is conducted without having obtained a [certificate], plus up to $200 per day for each day thereafter," according to Israeloff.
You obtain your Certificate of Authority by filling out Form DTF-17 (Application for Registration as a Sales Tax Vendor) and sending it to the address listed in the instructions at least 20 days (but no more than 90) before you begin operating your business. The sales tax bureau will use your federal ID number as your sales tax number, Weiner says. "As a practical matter, since the business just began, I would not hold up making the sale while waiting for the New York State sales tax authorization," he advises. But do fill out the form, and send it in as soon as you get your federal ID.
HELPFUL LITERATURE. Once you get the certificate, you must prominently display it at your place of business. You needn't renew it unless you're notified to do so by the tax department, Israeloff says. As a registered vendor, you must file a sales and use tax return that summarizes your business activities, even if you have no tax due during the filing period. For more information on sales taxes, check out "A Guide to Sales Tax in New York State" (Publication 750) at the state tax Web site.
Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues