Question

Mr. and Mrs. Underhill operate a hardware store in a jurisdiction that levies both a sales tax on retail sales of tangible personalty and an annual personal property tax on business tangibles. The personal property tax is based on book value as of December 31. This year, Mr. and Mrs. Underhill purchased $840,000 of inventory for their store.
(a) Are Mr. and Mrs. Underhill required to pay sales tax on the purchase of the inventory?
(b) How can Mr. and Mrs. Underhill minimize their personal property tax by controlling the timing of their inventory purchases?

Answer 1

Answer:

Sales Tax:

Sales tax is levied only on retail sales. Since the inventory is purchased by Mr. & Mrs. CS for their store, it will not qualify to be a retail sale. Property tax is calculated on the property. In our question, property tax will be calculated on the book value as on 31st December.

Step-I: Solution to the problem where sale is not a retail sale:  

No, Mr. and Mrs. CS are not required to pay any sales tax on the purchase of inventory, since it is purchased for store and not qualifies to be a retail sale.

Step-II: Property Lax liability on Inventory:

Now, Mr. and Mrs. CS will be required to pay property tax on the book value of inventory left on 31st December. They can minimize their property tax liability by adjusting the time of their purchases. If they could have purchased the inventory in January, then the inventory could have been sold throughout the year and the book value of the stock left as on 31st December would have been lesser. Thus, the amount of tax would also be lesser