Sales Tax exemption on flips?

Question

Ok, I've gotten one flip under my belt. We closed in 2017, I've already talked to a CPA regarding taxes and he suggested I roll the income and expenses into the same tax year. I've been reading quite a bit about how I'm going to be taxed and the consensus definitely appears that the IRS will consider it self employment activity no matter how many I do or even that I have a W2 income (though many people argue this point and I wish they were right). The good news for me is that the income from my day job almost gets me over the Social Security rate.

But anyway, that's just context for my real question.

From what I've been reading, the IRS considers this activity non-investment income because I am acting as a "dealer" and am simply selling my "inventory" as I would with any other good. The first checkbox on the MA ST-12 form to receive a sales tax exemption says "The materials, tools or fuel will become an ingredient or component part of tangible personal property to be sold". Since the IRS says I'm simply buying goods and materials to later sell, wouldn't all of my purchases for the house be considered an ingredient and not subject to sales tax?

I've read some articles saying the argument is that I don't collect sales tax at the time of sale, however nothing in that document says that a stipulation of being tax exempt is that the good will be taxable at the time of sale.

Would love to hear others opinions or experiences on this and also if you have any recommendation to lower my tax burden for 2017 would be greatly appreciated.

Linda Weygant · Answer

@Matt Mach - mostly it's the type of property, but it's also its sales taxable status at the end.  Houses don't have sales tax added to them in the end.  Or, to follow your analogy through, do you really want 6.25% of your sale at the end subject to sales tax?

Let's take a look at something different - a plumber who buys pipes and other stuff, and uses that stuff to fix your leaky sink.  Whether or not he can buy those pipes sales tax free completely depends on how he invoices his customers.

Method 1:  He quotes that he'll fix your sink for $100.  The quote includes parts and labor.  Because the parts and labor are not called out separately, he does not charge sales tax to his customer, but he must pay sales tax when he buys the parts.  (This is the same business model you're doing when you flip.  You don't call out the labor and parts separately when you sell).

Method 2:  He quotes that he'll fix your sink for $50 labor and bill you for parts.  Because parts are called out separately, he must charge his customer sales tax (no matter how much he marks up the parts), but he doesn't pay sales tax when he buys them.

It's a concept of the government actually trying to do the right thing and only charging sales tax one time during the transaction string.  It's a good thing.  Otherwise, as I said, you might get your parts sales tax free, but you'd have to charge your sales tax rate at the end when you sell the house.  That cuts into your buyer's ability to afford it and lowers the price you can get for your house.

You can't have it both ways.  Either pay the sales tax in the beginning or pay it at the end, but it must be paid.

Wayne Brooks · Answer

A house is not "tangible Personal property" (personal property Would be taxed when sold), it is Real property. And, the "to be sold" Does mean it would be taxed, upon that sale.   Give it up already, this not a loophole, it's a delusion.

Matt Mach · Answer

Thanks for the reply @Linda Weygant. I won't push the subject any further, I realize the pay now vs pay later idea behind sales tax, it would just be nice if it actually said that somewhere (maybe it does in some convoluted language). It was just confusing to me on how it worked for real estate since it's normally taxed differently in every other transaction except for flipping.

Matt Mach · Answer

Ok, so @Linda Weygant this is exactly where my confusion lies and basis for my question. The IRS doesn't care if I'm selling sandwiches or houses and I should report that income the same to the state as well. But my issues is that if houses and sandwiches are viewed the same, why does all the ingredients in that sandwich get paid for without sales tax but the house components do not?

So I'm not able to forgo self employment tax because it's a commodity that I'm selling but I also can't get a break on sales tax because it's real estate. The transaction should be looked at one way or the other. I could see if i was getting taxed with capital gain but this feels like double taxation.

Linda Weygant · Answer

Please stop spreading this misinformation.  It's not true.

The IRS doesn't care if you're buying a house, improving it and selling it or buying bread, bologna and mayo and selling sandwiches.  It's the exact same business model and it doesn't matter to them if you sell one house or one sandwich.  It's subject to self employment tax barring some other situational issues.

As long as your intent was to flip it, it's self employment.

Matt Mach · Answer

We actually closed on our second last week. CPA tells me I'm not going to make a good argument doing more than 1 per year.

Also, I realize the idea of buying widgets tax free so you can tell your multi widget thing after with tax included (more profits for the state), but the wording does not say anything about "multi widget item must sell sales tax". I realize I may be trying to take advantage of a loophole here but MA sales tax of 6.25% would be nicer in my pocket.

Rich Hupper · Answer

You should only be taxed capital gains. One flip should not make you into a "dealer"

Linda Weygant · Answer

Generally the sales tax exemption is for if you are assembling widgets and then selling the main widget on the end and charging sales tax on the end widget.

Real estate does not have a sales tax on the end sale, so for this reason, the components you buy for the property are not exempt from the sales tax.

Karolis Matulis · Answer

I'm not familiar with MA sales tax laws but sales tax exemptions are generally applicable in instances where you are not the end user of the product. The sales tax burden falls on the end-user. If you are in the business of buying and selling widgets you can get an exemption from sales tax on the purchase of the widget. The end buyer will ultimately pay the sales tax on the purchase.

In the manufacturing world ingredients or components are not taxed because sales tax will be collected when the end-product is sold. As the sale of homes is not subject to sales tax, I don't see the potential for a sales tax exemption. My knowledge of sales tax is limited to NJ, so it is possible that there may be some slight nuances in MA. I hope this helps.

Sales Tax exemption on flips?

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