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Business Purchases Under the FairTax |
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Written by Karen Walby
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Saturday, 01 July 2006 |
The following is a very common question you may hear regarding the FairTax and how business purchases are exempt from the tax. FairTax.org has now added the answer to this question to their official FAQ.
This article was written by Karen Walby, Research Director, Americans For Fair Taxation.
www.fairtax.org
Question: Since business purchases are not taxable, how does the FairTax keep individuals from pretending to have a business so they can buy things tax-free?
Answer: The FairTax has several features that make it difficult and very risky for persons to have a scam business in order to purchase items tax-free. First, in order for any person to purchase items tax-free for business purposes, the business has to be a registered seller and possess a registered seller certificate issued by the state sales tax authority. Registered sellers will be expected to file monthly or quarterly sales tax returns with the state (depending on sales volume). The certificate will enable the business to purchase tax-free from wholesale vendors, but the vendor must retain a copy of the registration certificate to justify not having collected tax on the sale. When a business purchases items for business use from a retail vendor, it will have to pay the tax on the purchase and take a credit against the tax due on their monthly sales tax return. They must keep invoices/receipts to document what they purchased and the amount of the purchase. They might also make note of the purpose of the purchase on the invoice.
Also, as registered sellers, they are subject to the possibility of being audited by the state. During such an audit they will have to produce the invoices for all the "business purchases" that they did not pay sales tax on, and will have to be able to show that they were bona fide business expenses. If they cannot prove this, then they will have to pay the taxes that should have been paid when the items were purchased, plus interest, and penalties. The probability of being audited will be much greater than it is under the current system with its over 140 million tax filers. Under the FairTax, there will less than 20 million businesses who will be filing sales tax returns and thus subject to the possibility of being audited. Thus the probability of tax cheats getting caught will be much greater than it is today, making tax evasion riskier than it is today. Additionally, while the FairTax has much stronger taxpayer rights than does the current tax system, the FairTax legislation provides for a number of fines and penalties for non-compliance. It also authorizes a mechanism for reporting tax cheats and obtaining a reward. An example would be 1-800–TAX-CHET.
Another potential scam is to have a “fake” family business in order to buy things for family members tax-free. The FairTax has a specific provision to prevent this. Although it does not prohibit businesses from providing taxable property or services as gifts, prizes, rewards or as remuneration for employment; the gift, reward, etc. is considered to be the conversion of property or services from business use to personal use and therefore taxable. Likewise, there is a similar provision to prevent abuse of employee discounts. Under the FairTax, employer-provided employee discounts over 20 percent are taxable. The term “employee discount” means an employer’s offer of taxable property or services for sale to its employees or their families for less than the offer of such taxable property or services to the general public. If the employee discount amount exceeds 20 percent of the price to the general public, then the sale of such taxable property or services by the employer to the employee is considered the conversion of property or services to personal use and subject to tax. The taxable amount is the amount by which the discount exceeds 20 percent of the price to the general public.
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Last Updated ( Tuesday, 18 July 2006 )
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