Discussion:Sales Tax and 0% Financing deals
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Discussion Forum Index --> Advanced Tax Questions --> Sales Tax and 0% Financing deals
Discussion Forum Index --> Tax Questions --> Sales Tax and 0% Financing deals
| 11 June 2009 | |
| Client came in today asking how to do these two things the right way <yay. 2 points for client>, so I told him I would find out.
We are based in upstate NY Client has just started using one of those 0% financing companies. Client does not want to absorb the finance charge hit when a customer chooses this option. For example, if client sells a $4,000 piece of equipment, the customer finances the $4,000 plus sales tax for a total finance of $4,320. Based on the length of time the financing is for, the finance amount charged to the store <client> is either 3.5%, 6%, or 8% of the total amount financed. So, if it fell within the 6% term, the amount deposited into clients bank account would be $4060.80 <4320 less 259.20>. Client does not wish to absorb this charge as he has priced the equipment at his lowest acceptable point. He was at an industry conference and was told by a Texas guy that he charges the customer a service fee of $259.20. He doesn't try to hoodwink the customer, he shows them the amount that the store gets charged based on the amount borrowed and the term of the payback period. That if the customer wants this financed, the customer must absorb this charge. I can't imagine he can price his product at $4,000 and advertise 0% financing and then tell the customer they have to pay this charge. He'd also prefer not to have a cash price and a finance price because the charge to him changes based on the term of the loan. And he wants to be completely legal and above board. The financing available is at a reasonable rate and is way lower than credit cards that are out there. The guy in Texas rings up the fee as a finance charge and then does not pay sales tax on it. Thing 1 - How to structure the selling/financing above in a legitimate and legal way. I told him he could not advertise 0% financing and then charge a finance fee to the customer. Thing 2 - If he has to structure this as a cash price and a finance price, is there a way that it can be structured so that the client pays sales tax on the cash price and the imputed finance charge be considered sales tax exempt? Thanks, Fred | |
| 12 June 2009 | |
| I don't know about Texas, but that's not done in NY.
The client must remit the full sales tax according to point of delivery, even if the customer didn't pay yet. NYS considers sales tax on an accrual basis.(Even if the customer is on a cash basis) The full sales tax has to be remitted. The only items that can be deducted from it is the Use Tax and the preparation fee allowed. | |
| 12 June 2009 | |
| In New York, interest, service or finance charges charged by a vendor and paid by the purchaser are NOT subject to sales or use tax. NYCRR 20 §526.5(h)(1). The same is true in Texas. Tex. Tax Code Ann. §151.007(c)(4). If the charge is truly a finance charge, then it is not subject to sales or use tax in either NY or TX as long as it is separately stated.
On the other hand, if Fred's client is advertising 0% financing and then adding a separately stated finance charge to the sales price, I should think he'd be vulnerable to an accusation of fraud. | |
| June 12, 2009 | |
| You had me involved until I got to the Thing 1 and Thing 2, and then I started thinking about the Cat in the Hat. | |
| June 12, 2009 | |
| I agree the client should not advertise 0% financing, because he's not doing that. That would be false advertising, or fraud as Katie put it.
Is there a way he can estimate the average financing cost? Is there perhaps some industry average he can look to? Or does the financing company have some additional information available? I would probably take the historical information and bump it up a little with the thought that people will probably go for longer financing terms these days. | |
| 13 June 2009 | |
| Client will not be advertising 0% financing. The financing company will only do the financing based on that concept. I already explained to him that advertising that way would be akin to the old bait and switch routines. This is an above board client which is actually quite refreshing.
Katie, I was hoping you would ride in. Thank you. I am off to read the code sections. The finance company will charge the client a set fee that would be deducted from the amount financed by the customer. This is a flat percentage based on the the time frame for repayment. Client is not looking to profit from the finance charge, he only wishes to pass this cost onto customer as his product price is as low as he wishes it to be. He would show customer the actual finance agreement and then let the customer decide after customer has all the information. The good thing is that the finance company rates can be as low as 3.5% of the amount borrowed. Much better than credit card rates. I also found out that businesses in NY are not allowed to advertise sales as tax-free or that they will pay the sales tax for the customer. They can advertise an 8% discount, but can not state no sales tax. Again, thanks. | |
