Consignment vs wholesale

If you’re a creative business owner crafting handmade goods, there are many brick-and-mortar retail shops and even websites that can help you get your goods sold wholesale. If you can keep up with the demands of a larger order wholesale purchases can make you feel like Christmas has come early! But who collects and pays the sales tax from these orders? 

Consignment

Consignment is defined as the loan of property or goods to later be sold. This means that if an outside company places an order of consignment for your products they are not purchasing but merely displaying or holding the products in their store to be later bought by individual customers. Because there is no initial purchase, the consignment store usually makes money by charging a commission for any sales made and sales tax is charged to each individual customer upon the point of sale. This means that the consignment store is responsible for collecting sales tax from the customer and sending this to the State Department of Revenue. Plus, as there is no immediate sale when the consignment order comes in, the maker or crafter doesn’t need to be concerned with sales tax for these products. 

There are a few exceptions. Usually, if a consignment store can’t sell the products (for whatever reason), they will have to return these to the original crafting business. If it fails to return these, the consignment store may be liable to pay USE tax, unless it is sold at a later date, in which case sales tax must be collected. 

Use Tax

Use tax is a counterpart to sales tax and can be claimed on the storage or holding of products, where no sales tax is later claimed. (You bought something, didn’t pay tax, and ultimately used it rather than selling it.) In Tennessee, use tax may be claimed on out-of-state merchandise which is imported for use or consumption. There are a few perceived benefits to this. One being that Tennessee makers and small business owners can avoid potentially unfair competition from out-of-state businesses who may charge lower prices for their goods. It also means that the state department can continue to collect a form of tax even when out-of-state sellers do not collect Tennessee sales tax, generating revenue for the state. 

Wholesale

Wholesale is the sale and distribution of goods to anyone other than the standard consumer, usually for resale. For some small business owners, here is where wires get crossed and it becomes unclear which business is supposed to collect the sales tax. But it doesn’t have to be difficult. As a general rule of thumb, if the items are being resold by the wholesaler, they are the ones required to collect and pay sales tax from the final customer to the state Department of Revenue. However, if the item is not being resold, the maker is required to collect and pay the tax. For example, if a shop ABC buys candles at a wholesale price, ABC will collect the sales tax from their end customer. However, if ABC buys shelves to hold those candles from XYZ and they are not then resold, XYZ is required to collect and pay sales tax. 

Once again, there are several exceptions to this, especially if the wholesaler is reselling to anyone who is not the final user. In this case, a resale certificate would be required by the state to exempt the wholesaler from sales tax collection. Another exception is with the selling of services - more to come on that.

Still wondering whether you should be paying sales tax on consignment or wholesale orders? Let’s schedule a chat to talk through your business finances and make it easy to go forward.