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Use tax on inventory consumed for a customer demonstration?
If inventory is pulled out of stock and used by a customer (at no charge) during a demonstration period of a piece of equipment, is use tax due on those items?
Everything I find says we owe it, but it also doesn’t ‘feel’ right to my boss. I am not a tax expert at all so I could be misinterpreting the liability to the situation, but if I am right, I need concrete sources to back it up. If we don’t owe it or there are technical ways around it like billing the freebies at a penny then writing off the invoice I would be interested.
Please cite your source but all opinions are welcome. (CA based company but this situation occurs in many other states where we have a resale certificate and file sales and use tax returns).
help me prove that there is no loophole to my boss! he doesn’t believe me!
Use tax is due in every state where you use your own inventory for demonstration purposes. This is because you initially purchased the items tax free with your resale certificate. With the certificate, you “promised” to resell everything you bought. But, you didn’t–you used some of it yourself. Therefore, use tax must be paid on your return.
Yes, you can charge $.01 for the material used in demonstration and get out all the use tax, since you resold it for $.01. However, you can’t write off the invoice–someone’s got to pay it. There may be an argument to use it as a bad debt deduction, if your state allows it, but will likely not hold up under audit.
Remember, that the use tax is due on the COST of the item, not the retail price.
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