Can you offer “Sales Tax Paid” deals to your customers? As with so many sales tax questions, it depends on your state. In Missouri, for example, a bill allowing “Sales Tax Paid” ads passed the state House last month. Washington state allows retailers to advertise that they pay the sales tax if the words “tax included” are said as loudly as the rest of the commercial or shown in letters at least half the size of the other words in the ad, and if the tax is also shown separately on receipts. The majority of states, including Nebraska, and Ohio, do not allow this kind of deal at all.
In some states, such as Kentucky, it’s illegal to advertise a willingness to pay the sales tax even though retailers are allowed to pay it, and in many states, it is illegal to pay sales tax for someone else. In many states, certain transactions (such as drinks in a bar) can be conducted as tax-included sales, but others cannot. Why would anyone want to pay their customers’ sales tax? Retailers with high-ticket (and negotiable) items such as cars may want to sweeten the deal by paying sales tax. Those who are competing with sellers who don’t charge sales tax may be asked to pay the sales tax as part of negotiations — the buyer may say, “I wouldn’t have to pay sales tax on this if I bought it from Company X in Montana.” You can point out that your customer is probably still required to pay a use tax, but consumers often fail to pay use taxes, so that might not impress your customer.
The practice of paying the sales tax for the customer is called “absorbing the tax” or “absorption.” Why do states object to absorption? Actually, it usually comes down to the specific form of sales tax system used in your state. Some states tax the seller, some tax the transaction, and some (most) tax the consumer. You are collecting tax money on behalf of the state and passing it on to the state if your state taxes consumers. You don’t have the option of changing the rules. Your books have to show the purchase price and the sales tax separately.
Absorbing the sales tax may make it harder to conduct an audit. “Sales tax paid” deals may make it more difficult to determine the actual amount of sales tax you should be paying since it might prevent you from capturing sales tax exemptions. As you can see, states are concerned about proper record-keeping in the case of absorption. They are concerned enough that in many states it is a crime to advertise “Sales Tax Paid!” As you’ve no doubt noticed if you’ve spent much time working with sales tax, things change. Be sure, before you negotiate a sales tax paid deal and especially before you advertise one, that your state allows you to do this.