Consumer Tax and Understanding VAT
Consumption taxes are basically just any tax on consumer spending um it always happens at the purchase level outside the u s typically, countries have what's called that evaluate attacks or gsd goods and services tax and it charges sales tax at every part of the manufacturing process. So in this case we have a sheep farmer um who sells will teo? I don't know what they're called a rover someone who makes well roving um they have taken what is essentially a product of no commercial value that is well on a sheep on dh they have removed it from that sheep and by doing so they have added thirty cents of value to it. So they charged we're assuming a ten percent tax rate here to keep things simple, they're charging if three percent I'm sorry a three cent that on that then the rover takes that wool and turns it into a beautiful smooth carded wool that they sell to a spinner by taking the rough wool and refining it. They have added thirty cents of value because they're now selling it at sixty c...
ents an ounce, so they have also added thirty cents they charge another three cents of that when the spinner turns that into yarn and sell that to a yarn dire for a dollar twenty they're deciding that they're that spinning this roving into yarn adds sixty cents of value so then they charge this person six cents worth of that and so on and so forth down the line. In the end, all of the total taxes add up to forty eight cents ten percent of this. Um but each person in the process has to collect tax from the next person and then submitted to the government here in the u s we have sales tax which happens at on ly one part of the process. It only happens at the end. All of these other people are wholesalers and sales tax does not apply to wholesale it on ly applies to retail. That is, sales tax only applies to sales that go to the end user, the last person in the chain. Now it may be that this person is the last person in the chain. Maybe, um, you know, I like to buy undine wool, and I die it myself. And then I turned it into scarves. Um, in that case, the tax would get charged at this step. In this example, we're assuming that there are all these other people involved and that, you know, the person who buys this scarf does not do the knitting, does not do the dying, does not do the spending, does not do any of that other stuff, and so the on ly person collecting the tax is this knitter from this buyer and they're sending it into the government it's still the same amount of taxes still forty eight cents but only one person is collecting it and sending it as opposed to everyone in that chain in the bad example and on etsy um unless you're in etc wholesale and we'll get to see wholesale in a later segment um you are always this person so you are always the person in the u s who needs to collect this um if you're in europe or elsewhere and you're collecting battery gsd you still have to collect this it's just a much smaller amount because the government has already gotten their cuts all along the chain here okay, so um I'm just gonna talk for a moment about that digital that rule that they have in europe and um we'll look at a couple of things that people can do about that when we get to digital products in the later segment um but as I mentioned a january first of this year if you are selling digital products to someone in the you you need to collect the bat on that and then submit it to the appropriate country um this is really difficult for people outside the e u to do most of them don't even know what that is I'm guessing that a lot of americans just looked at that last charge were like oh oh that's what that means when I travel abroad and they have that thing on my receipt I didn't know um and again um as I mentioned, that is already collected on physical goods that you're sending to other countries it's just that the buyer has to pay it when they get to the post office. So it's nice to give people a heads up to those international buyers this may include up to twenty five percent in that if you were buying from outside the u s just to j f y I um this price does not include that uh there are also what are called excise taxes. So if you sell a particular kind of product um I mean, they apply to things like gasoline and cigarettes whatever they also apply to alcohol, so if you make like, um, I know a lot of people are getting into sort of craft distilling and that sort of thing s o if you make, like, homemade bitters and their alcoholic um that would require an extra tax on top of that. Um and then there are also a lot of exceptions to this. So, like most food in the u s is not sales taxable um unless it's a kind of luxury foods like chocolate has tax on it, um but maybe those chocolate chip cookies don't right so if you're one of those bakers who's selling things on it so you've got to kind of be careful about what category you fall into and again I do not know the rules for all of these categories I do not know the rules for every location um I'm here in california so that's about all that I'm really intimately familiar with. So if you have questions about that you definitely want to talk to your local revenue agency or you want to talk to a c p a or a lawyer about that um there's just too many variables to get into here. Ok um let's move on to this last sales tax slide um in the u s and items generally sales taxable if it is a tangible good you can hold it in your hand it is sold retail to that end user remember the last person in the chain and it's in state so when you're entering things into your ledger you will either need to enter the sales tax rate for where you sold it. Um in california and a lot of other states in new york um you will need to put in the district where you sold it because those are all different tax rates or if it's not sales taxable you need to give a reason why you either need to say it's non tangible it's wholesale or its out of state because when it comes time at the end of the year to turn in that sales tax return they will ask you all of those questions how much did you make in total sales how much of that was taxable? What district's did you sell those in anything that wasn't taxable tell us why so you'll have to keep track of that all along the way uh if you do a craft fair out of state but you are selling in state and you're sort of temporarily residing in that state very often you'll have to get a temporary seller's permit and then collect sales tax at that event in that state and then submitted according to all of their rules which is super fund um that's neither here nor there when it comes to etc but there are very, very many etc sellers who do craft there, so I figured we should probably put that info in there um and then we will look at this also, but if you buy something um along the chain and you are charged sales tax because they think you're the end user but you're not actually you can take that off the amount that you send into the state at the end of the year so or at the end of june um here in california, whatever your pay period is, a lot of other places collect sales tax on a quarterly basis in varies by state by country you really need to look it up uh for your particular location so um if for example I went tio jo ann fabrics and I bought some fabric they're going to charge me sales tax on that right? Um but then I turned it into a plush toy and I sell that to someone so technically about that fabric wholesale so I shouldn't have paid the sales tax on that the sales tax I paid on that fabric um will be what I call prepaid sales tax we will mark it as such in the ledger and then when it comes time to pay your sales tax return, you'll take that off that's also a category that they'll ask about did you already pay for some of the sales tax that you owe and I'll say why? Yes, I did I paid ten dollars in twenty one cents on these items that I actually bought wholesale here's that slide on the that rules in the u s so it effects anyone selling digital goods to customers in the you even if your business is not in see you to comply, you need to register to collect that um either in every country where you've had a customer or you need to pick one country is sort of your home based country on dh then use what's called them the vat moss the mini one stop shop um and submit to all of the countries through that many one stop shop um what are people doing about this on enciso, etc issued a pretty unhelpful in my opinion statement about this that basically says like here's the rule it's sort of up to you to comply we're looking at ways to add features that make this easier um and again we need to look at the digital products and see if it's even possible to add, um that country tax that's in the sales tax action sales tax section for your shop set up full of deliberations uh, so we'll check that at the at the longer break but in the meantime some other ways that people have been uh addressing this problem is to either one stop selling two countries in the eu well stop selling digital products anyway to countries in the eu which is tough uh, you know, you can choose not to ship to certain countries on etc but I'm pretty sure you can't choose not to sell two people in certain countries I don't think that that's uh that's possible um you can put in your listing description um you know that this is that this is coming up and that you know well for a digital download, you'd have to make it like not automatic so that people would actually to contact you to download the file as opposed to making it an automatic downloads you kind of have to turn off the automatic download feature that's not great. Um other possibilities you could set all of your payment for digital products toe other so that everybody has to contact you and you have to have a conversation with them before they pay you and before the sales goes through either way this this could really affect your sales um again this is only for digital products of this is not for everybody. Um but it's been sort of a mess and everybody's up in arms about it and it's like the most popular question I got before I started teaching these bookkeeping classes. What do I do about this new you that law um again, this is something that you should really talk to your c p a or your lawyer about a ce faras compliance um you know, I think it would be very difficult on dh not at all cost effective for all of these different revenue agencies to come like chasing you down for, like, twenty cent in vet that you maybe didn't collect and pay accurately. But if you do a lot of business in the u especially um it's a lot more likely that that sort of thing might happen um I know that some countries like the u k are looking into passing legislation that puts a cap on that so that if you make less than, say, one hundred thousand dollars or a million dollars or euros as it were, um per year than you're not subject to this, um so we'll see where that goes. Um, I wouldn't go crazy putting any, you know, new, uh, I don't know procedures into place for this unless you sell a lot a lot of digital products um, and you sell a lot of them to customers outside the u s because I suppose you could always still figure out that that later and send it in, even if your customers not aware of it, right? Because this is on the seller to sellers responsibility technically, so if you wanted to just sort of go ahead with businesses usual and then eat that cost, if it turns out that that cost does come up that's also an option on then if it turns out it's not a big cost, then maybe it wasn't worth, you know, then maybe it ends up not being worth affecting your sales to put all of these other crazy things in place. So these air, you're not great options for complying with this new law? What can I say? Hopefully the european union will get it together in response to this like giant mess that's happened right now, um and they'll revise things so that there's a cap. Or that there's an easier way to calculate this. And hopefully all of the big online marketplaces like etsy, like big cartel like shopify. Um, we'll also be able to get features in place that handle this in case it comes up.