What is a Vendor Allowance or Discount?
Don’t think you can make money off of collecting sales tax? Think again. There are a few ways that some businesses actually profit from collecting sales tax — and many offset the costs. One of the most popular ways is through what’s often called a vendor allowance or discount. It works by letting businesses keep a portion of their sales tax receipts to help cover the costs of administering sales tax. A business that collects a large amount of sales tax funds can put all the sales tax money they collect into a bank account that earns interest.
While it may offer a low interest rate, it’s usually enough to cover the expenses of collecting sales tax—or even enough to make profits, as long as they file sales taxes on a quarterly basis. “Floating” sales tax between collection periods can actually prove pretty lucrative for savvy businesses that know how to use the system to their advantage. The higher your sales, however, the more often you have to remit sales tax and that can mean monthly sales tax filings. When your sales tax money can’t accrue in a bank account and make interest, you might be unable to cover the costs of collecting sales tax. Some states offer businesses a solution by letting them keep a portion of sales tax revenues they bring in, ranging from as little as .015% for electronic filers in South Dakota to as much as 5% in New York.
Some states also put caps on how much businesses can hold back and others define minimum amounts they are required to keep. The Federation of Tax Administrators has a useful reference sheet as an overview, but you should always check with a specialist before implementing vendor discounts. In 2009, Utah businesses balked at Utah’s discussion about removing vendor discounts, stating that it costs businesses around 3.1% of taxes collected for compliance. Utah only gives 1.31% of sales taxes collected to pay for the costs of compliance to Utah businesses, putting them at a negative for compliance with sales tax.
Your state doesn’t expect or want you to make money collecting sales tax—but reducing the costs of your sales tax compliance can get you closer to the vendor discount amount and keep the cost of compliance from eating away at your profits. Looking for a way to keep your costs low when it comes to sales tax filing? Sign up for a free evaluation and we’ll show you just what a difference Sales Tax DataLINK can make.