Cost of Goods Sold Question

Well, that depends. You'll hear a lot of that here. Who forks over the tax to the state? I would assume you do since you are the retailer. In that case you would report the sales tax collected as income and deduct whatever you pay to the state as sales tax expense. If you just take orders and are not the retailer, the sales tax is paid to the manufacturer and he pays it to the state. If the money doesn't pass through your hands or bank account then it need not be accounted for by you. Given the general level of intelligence of IRS auditors, if it hasn't gone into your bank account it doesn't belong on your tax return. Shipping appears to be paid to the manufacturer who then pays the shipping company. Shipping does not go on your return since you don't handle the money. There may be other opinions about this recordkeeping system but if you get audited and "admit" to the IRS that some money on your books did not go through your bank account, they will wonder how much more there is. You might want to read Minding Her Own Business by Jan Zobel, E.A. and Small Business Taxes Made Easy by Eva Rosenberg, E.A. Both books are inexpensive and are good desk references when IRS publications are too wordy and unclear. Linda Dorfmont E.A., CFP, CSA

I'm a little confuse on this issue, I can't figure out how the credit card actually operates in this transaction. Look-the tax code says that "income" includes income from every source. If all you're getting is the commission check from the manufacturer, that's all you report. If you're buying the item on your account-that's your purchase expense (COGS) and the customer's payment to you is your income. If you're not paying for shipping, you can not take the expense. If you are not collecting the shipping from the customer, you don't record the income. The bottom line is that you must account for all income from every source. If you have expenses, you must have a receipt for its payment- you just can't enter it on your books. If its on their credit card, its their expense, not yours. In summary, you have to report all income, if you don't the IRS might nail you. Just because you have off- setting expenses doesn't mean you don't have to report the income. If you have off-setting income and expenses, you report both the income and the expense. If the customer is paying for some stuff, you cannot take the expense. And if you don't have income, you don't have to report income. Hope this helps.

That makes sense to me. The customer calls me to place an order, so I am making the sale. That's why I report it as income. Then, I drop-ship the order on my account on the manufacturer's website. Since the manufacturer pays the sales tax and shipping, using the customer's credit card, it makes sense to keep those amounts off my books. It looks like I only need to report the sale of the product itself as income and the value of the product as a purchase. I think that's what you're saying. Thanks! Scott

The cash flow still isn't clear. Assume I'm the customer. I order something from you. You charge my credit card $1,000. You pay the manufacturer $800 to drop-ship the goods to me; he charges my credit card $100 for sales tax and shipping. In that case, you have $1,000 income from the sale, and $800 cost of goods sold. On the other hand, if the manufacturer charges my credit card $1,100 and puts $200 into your account with him (or pays it by check), you have $200 commission income. Seth