Consignment rip-off or legit practice?

[JayBee1404]

Vindi and Kalani - I understand what you’re both saying but whilst, as someone who doesn’t like paying tax I’m with you, as an accountant I can’t agree (other than that it should have been made clear by the store at the outset that the commission charge would be subject to tax)! But I’m sure you won’t be surprised to hear that!

So, I’m bowing out now. I do hope Vindi can get some comfort with this issue - tax accounting isn’t always a simple thing to understand, but there is logic in there once you get your head around it!

I’ll check in to the thread now and again to see if anyone who has the definitive, indisputable answer has come along.

Thank you both for this conversation, and best wishes.

[FLRon]

Money aside, I would have been furious with this shop owner for not telling me that my guitar had sold for three months.
Any and every way I could leave negative feedback or reviews would be my next move. It's a given that I would never do business there again,so I'd do what I could to keep other potential victims away from this shop.

[seannx]

I bought my G&L ASAT electric from a local store. The price was $1,100, reduced by the owner from the original $1,200 asking price a week before. The store took their commission based on the $1,100 sale price. I paid about $100 additional in sales tax.

I've sold an amp and two guitars through the same store (Loud and Clear Music in Cotati, CA) on consignment. They made a contract that stated what I would receive for each item, and they added their commission to determine the selling price. Each time an item sold, I got a check within a week.

The OP didn't get any part of the sales tax, and neither did the store. It all went to the government. IMO applying the 25% commission to the sales tax is simply an unexpected way for the store to get more money. Regarding accounting, while gross receipts can include sales tax, the tax amount is a separate line item. The customer pays the tax on the cost of the goods, and the company remits that tax to the government on a monthly, quarterly, or yearly basis.

Here's another example. Say we have someone bring a client to our store, and agree on a 10% commission on what their client buys. We aren't going to give them 10% of the sales tax value, as that money all goes to the CA BoE (board of equalization.)

[BluesKing777]

So we pay 10% tax when buying the thing and another 10% when we sell it? Minus the 20 - 27 1/2% (shop near me!) consign fee...yep, guitarists are idiots, that is for sure.

We should just keep 'em!

BluesKing777.

[chippygreen]

Originally Posted by vindibona1

The way I see it, the SALE was between the buyer and the consignor (on my behalf). The tax was between the buyer and the taxing body and the consignor in accepting the tax was an agent of the taxing body and the tax should not have impacted the commission he charged.

Let's look at a parallel... A realtor acts as a sales agent for someone selling a home. They agree to a 6% commission....And when closing, even there is a laundry list of taxes and feesl, the commission is ONLY paid on the sale price of the home. I see this as no different.

Vin, I understand why you use this analogy. There are some technical differences between a home sale and the OP's situation but I come to the same conclusion as you.

In a home sale, the realtor is a broker and does not hold title to the home. The broker renders a service for which the finder's fee is 6% of the sales price. The broker does not sell the home, but merely facilitates a sale between the existing title holder and the new title holder. In the music store, it's probably the case that the receipt given to the buyer is issued by the guitar store. The contract is between store and buyer. Unlike a home sale in which the seller and buyer sign a single sale and purchase agreement I think in the music store there are in fact two sales that happen one on top of the other.

1) The guitar store sells a guitar to the buyer for $2000. If the sale of a used guitar is taxable in the state, state tax applies. The guitar store has a responsibility to remit $200 of tax to the state. The guitar store also has reportable income of $2000.

2) Sitting underneath that transaction, the consignor (OP) has sold the guitar to the guitar store for $1500. For income tax purposes, the guitar store has a $1500 expense. The guitar store makes a profit equal to the "commission" of 25%, $500. That ties out: reported income of $2000, offset by cost of goods sold of $1500, taxable income of $500. This will be reflected in the income statement.

What then of the sales tax? The sales tax is a pure pass through. It's not reported in the income tax filing. The tax is payable by the purchaser to the state. The guitar store is designated as an agent for the purposes of collecting and remitting the tax. The basis of the tax is the sale price of $2000, the tax collected is $200 and the total amount should be remitted to the state.

Conclusion (IMO): the guitar store did not have an accounting or legal basis for reducing the commission paid by $50.

With respect to JayBee, I am not sure I characterize the "commission" as a taxable service (though I understand the accounting basis for that conclusion).

If the guitar store rendered a service, then the sale (as in a home sale) would have taken place between the consignor and the buyer. In this characterization, a sale between consignor and buyer, either the consignor would have been responsible for collecting and remitting the sales tax, or, more likely, it is an exempt private sale for sales tax purposes. However the better (in my view) characterization is that there are two stacked sales, which explains why the guitar store felt obligated to collect and remit the $200 sales tax. But as I said, I don't think $50 should have been skimmed off the commission.

[Nama Ensou]

Originally Posted by kiva238

1, Talk to the shop and clearly explain your position and understanding of the deal.

2. Tell them exactly what it is that you want them to do to remedy the situation and satisfy you.

If that doesn't move the shop to refund the money based on the tax, I would then:

1. Tell them that this is now a point of discussion on the AGF, and since they are standing by their position and believe it to be a correct one, they should have no issue with you disclosing the shop name on the AGF.

2. I would tell them that you intend to contact the BBB in your area as well as the Consumer Fraud Division in your state.

I'd absolutely be going to the BBB in your area and you're doing nothing but a public service by posting the name of the store.

[JayBee1404]

Right, I’m going to give this one last try then, for the sake of my sanity, I’m out!

Originally Posted by seannx

The OP didn't get any part of the sales tax, and neither did the store. It all went to the government.

Correct.

Originally Posted by seannx

IMO applying the 25% commission to the sales tax is simply an unexpected way for the store to get more money.

No, the store didn’t ‘apply 25% commission to the sales tax’. Check my posts #15 and #56. Both posts set out the numbers, showing how the amount the seller actually received was calculated.

Originally Posted by seannx

Regarding accounting, while gross receipts can include sales tax, the tax amount is a separate line item. The customer pays the tax on the cost of the goods, and the company remits that tax to the government on a monthly, quarterly, or yearly basis.

Correct. Likewise with the sales tax on the commission charged by the store for their middle-man services. All the tax goes to the government, the store makes no ‘extra money’. There were two taxable events -

1) Th sale of the guitar - tax $200 paid by the purchaser to the store, and by the store to the government, the seller is not involved in this taxable transaction.

2) The commission charged to the seller by the store - tax $50 deducted from the sale proceeds due to the seller, and passed on by the store to the government.

Originally Posted by seannx

Here's another example. Say we have someone bring a client to our store, and agree on a 10% commission on what their client buys. We aren't going to give them 10% of the sales tax value, as that money all goes to the CA BoE (board of equalization.)

Correct. And that’s what happened in this case. I repeat, check out the figures in my posts, which demonstrate the calculation of the sum actually received by the seller. No ‘extra money’ was made by the store, nobody was ‘ripped off’, but the seller was charged 10% sales tax on the commission, which he appears not to have been told about when he took the guitar to the store. He expected 2,000-500=1,500, but he received 2,000-500-50=1,450. The $50 difference is the sales tax of 10% on $500 which the store charged on their commission, which they have to pass on via their tax return to the government, and which they appear to have failed to warn him about. That’s it.

In fairness and with due respect to the OP, I believe he either received a garbled explanation from the store, or he misunderstood what they told him. Either way, it would have been far better if they had given him a proper written statement of the calculation of the amount due to him, so there could be no misunderstanding - that’s the professional thing to do.

I apologise to everyone for keeping batting away at this, but my professional instincts are well and truly roused, and I’m finding it difficult to ignore.

Unless someone comes along here who is a Taxation expert in the state of IL, and tells us something I’m not aware of in connection with sales taxes there, that’s everything AFAIC. I really don’t know how to make it any more simple, and I need some sleep...nighty-night everyone!

Final Disclaimer - as I’ve said all along, I’m not an expert on US/IL tax regs, and I’ve assumed that sales commission is subject to sales tax under those regs. If that’s not the case, I’m wrong - can anyone out there advise?

[seannx]

Originally Posted by JayBee1404

Final Disclaimer - as I’ve said all along, I’m not an expert on US/IL tax regs, and I’ve assumed that sales commission is subject to sales tax under those regs. If that’s not the case, I’m wrong - can anyone out there advise?

The OP's guitar sells for $2,000. $1,500 (75%) goes to the OP, and $500 (25%) goes to the store. The buyer pays $2,000 plus $200 (10%) sales tax, for a total of $2,200. The $200 goes to the state.

Who ultimately gets the money isn't important at the time of sale. The state just wants the appropriate amount of sales tax collected by the store, and passed on to the government.

What the store is doing, is taking a 25% commission on the total amount paid by the buyer including sales tax ($2,200), which comes to $550. Then they are deducting the entire sales tax amount ($200) from the remaining $1,650. That leaves the OP with $1,450.

Following this logic and to be fair, the OP should get $75% of $2,200, which is $1,650. The OP's 75% portion of the sales tax is $150, leaving the $1,500 he expected to get. The store is responsible for $25% of the sales tax ($50), and nets $500 on the sale. There's no additional sales tax to be paid by the store on their $500 profit. The full $200 (10%) sales tax has already been paid to the store by the buyer. As the sale is going through their business, they collect and pass on the $200 to the state.

Here's another example which may help. Someone from a different store buys the OP's guitar for $2,000. They think it's underpriced, and are going to resell it, making it a wholesale (non taxable) purchase. No sales tax is charged. The OP would get his 75% ($1,500), and the store makes 25% ($500.)

[12barBill]

Originally Posted by seannx

The OP's guitar sells for $2,000. $1,500 (75%) goes to the OP, and $500 (25%) goes to the store. The buyer pays $2,000 plus $200 (10%) sales tax, for a total of $2,200. The $200 goes to the state.

Who ultimately gets the money isn't important at the time of sale. The state just wants the appropriate amount of sales tax collected by the store, and passed on to the government.

What the store is doing, is taking a 25% commission on the total amount paid by the buyer including sales tax ($2,200), which comes to $550. Then they are deducting the entire sales tax amount ($200) from the remaining $1,650. That leaves the OP with $1,450.

Following this logic and to be fair, the OP should get $75% of $2,200, which is $1,650. The OP's 75% portion of the sales tax is $150, leaving the $1,500 he expected to get. The store is responsible for $25% of the sales tax ($50), and nets $500 on the sale. There's no additional sales tax to be paid by the store on their $500 profit. The full $200 (10%) sales tax has already been paid to the store by the buyer. As the sale is going through their business, they collect and pass on the $200 to the state.

Here's another example which may help. Someone from a different store buys the OP's guitar for $2,000. They think it's underpriced, and are going to resell it, making it a wholesale (non taxable) purchase. No sales tax is charged. The OP would get his 75% ($1,500), and the store makes 25% ($500.)

That's spot on. Exactly as I see it. Precisely stated.

What I am asking, and fail to get from the original post or see expressly stated in the thread (Vin, please forgive me if I have flat out missed something) is what amount did you receive:

$1500?
$1450?
$1650?

[JayBee1404]

Seannx - are you saying that the $500 commission is not subject to sales tax, and is that a solid fact, or are you making an assumption?

My whole premise has been based on the assumption that, as the commission charge - which is a charge for sale of services to the seller - forms part of the store’s earnings, it is subject to tax (as it would be in the UK), and I’ve stated several times that I’m not sure about that. If you’re correct (and I’m not suggesting you’re wrong here, just asking a question) then your proposal makes complete sense and the store have dealt with it the wrong way.

And it would mean Ive wasted a lot of time labouring under a misconception!

[roylor4]

Originally Posted by JayBee1404

Seannx - are you saying that the $500 commission is not subject to sales tax, and is that a solid fact, or are you making an assumption?

My whole premise has been based on the assumption that, as the commission charge - which is a charge for sale of services to the seller - forms part of the store’s earnings, it is subject to tax (as it would be in the UK), and I’ve stated several times that I’m not sure about that. If you’re correct (and I’m not suggesting you’re wrong here, just asking a question) then your proposal makes complete sense and the store have dealt with it the wrong way.

And it would mean Ive wasted a lot of time labouring under a misconception!

The fact that the store owes taxes on the profits made from the sale is their problem, not the OP's and is a totally separate and independent matter that should have no bearing on the commission.

[RP]

Originally Posted by roylor4

The fact that the store owes taxes on the profits made from the sale is their problem, not the OP's and is a totally separate and independent matter that should have no bearing on the commission.

Exactly.

I've been following this thread after initially posting that the store had indeed pulled a fast one IMO, and my opinion hasn't changed a bit. The store performed a service for the OP for which they should have received 25% of the sale price. Since the store was a retail establishment, they had the responsibility to collect taxes and submit those taxes to the appropriate government entity. The store should not be entitled to make a profit on the taxes collected PERIOD. The store collects taxes - the store submits taxes - pure and simple...

[JayBee1404]

Originally Posted by roylor4

The fact that the store owes taxes on the profits made from the sale is their problem, not the OP's and is a totally separate and independent matter that should have no bearing on the commission.

You're confusing sales tax on the sale of a service with corporation tax on profits. As I've said several times, here in the UK sales tax (called VAT) is chargeable to the customer who purchases those services, and commission on a consignment sale is viewed as a sale of services and would be subject to tax.

There are some differences - too complicated to go into here - between your sales tax and our VAT, but if the shop was here, the seller whose guitar was on consignment would be charged tax on the commission.

That's been the cause of my confusion - I've readily acknowledged that there is a gap in my knowledge of US/IL tax regs, and I've asked the question several times. seannx is the first person to answer it for me.

So, I'll put my tail between my legs, eat that piece of Humble Pie I mentioned earlier, and back right off this thread.

Two good things from my POV are that (1) I've learned something new, and (2) I've had a very enjoyable back-channel conversation with the OP, which I'm very happy about!

Have a nice day everyone.

[why2]

Wake up, smell the coffee, open up AGF and get the brain cells working. This is a great forum.

why2

[JayBee1404]

Originally Posted by why2

Wake up, smell the coffee, open up AGF and get the brain cells working. This is a great forum.

why2

It is indeed!

And it’s even greater because, in this world of internet-wars, we are able to have a long, involved discussion with many different viewpoints, including misconceptions and false assumptions, but remain civil and polite in our deliberations. I, for one, very much appreciate that.

Thanks, guys.