Accounting 432/732

Handout 2

Part A

Required

For each of the following situations, determine on what basis (if any) the purchase transaction may be excludable from state sales taxation. The purpose of this case is to give you practice in recognizing sales tax issues. Resolution of the issues depends on the laws of the particular state in which the transaction occurs.

1. Happyland, Inc. operates an amusement park and charges a single admission price entitling its customers to enjoy all the park facilities. Admission sales are subject to state sales tax. Each customer who pays admission receives a park map and a cap printed with the park’s logo. Happyland, Inc. purchases the maps and caps in quantity from a local manufacturer.

2. Crawford Corporation manufacturers bathroom fixtures, which it sells at retail through a number of showrooms in the state. During the current year, LKJ, Inc. purchased $455,000 of fixtures from Crawford; LKJ used these fixtures in the construction of mobile homes that the corporation sold to distributors throughout the country. During the year, RST Partnership purchased $229,000 of fixtures from Crawford; RST used these fixtures in the construction of residential homes that the partnership marketed and sold to the public.

3. Lew Higgs is a freelance photographer. During the current year, Libson Products, Inc. commissioned Lew to take a series of pictures of various breeds of cats. Libson used the pictures purchased from Lew as illustrations in its 2003 Calendar for Cat Lovers, which is sold in bookstores nationwide.

4. The Waterplace, a luxury hotel in downtown Chicago, provides each guest with complimentary shampoo, soap, bath oil, and toothpaste. The hotel purchases these amenities in bulk from a local distributor. The price paid for the hotel room is subject to state sales tax.

5. Yummi Foods, Inc. manufactures gourmet ice cream. One of Yummi’s most popular flavors is Ginger Crunch---vanilla ice cream containing pieces of gingersnap cookies. Yummi buys the gingersnaps from a local retail bakery, which gives Yummi a special price for day-old cookies.

6. Trion, Inc. manufactures washing machines and dryers. As part of its testing program for its finished products, Trion periodically purchases a variety of clothing and fabric products (towels, curtains, etc.) randomly selected from different retail outlets. These products are washed and dried repeatedly in Trion machines and then checked for tears, fading, or other possible damage. After testing, the products are donated to a local homeless shelter.

7. Tammi’s Copying, Inc. provides copying and other printing services to walk-in customers. Tammi purchases paper for its copiers in bulk and charges its customers

4 cents per copy. During the current year, Tammi expanded its operations by purchasing a dozen computers available for customers’ use for word processing. Customers pay an hourly fee to use the computers on the corporation’s premises.

8. Tolen’s Grocery purchases both paper and plastic bags from a local supplier. The bags are used by Tolen’s customers to carry their groceries from the store. Tolen offers a

3-cent refund for every plastic bag that its customers return for re-use; this refund policy does not apply to paper bags.

Part B

1. Using the following information from the books and records of Grande Corporation, determine Grande’s total sales that are subject to State C’s sales tax. Grande operates a retail hardware store.

Sales to C consumers, general merchandise / $100,000
Sales to C consumers, crutches and other medical supplies / 11,000
Sales to consumers in State D, via mail order / 24,000
Purchases from suppliers / 35,000

2. As a retailer, Granite Corporation sells software programs manufactured and packaged by other parties. Granite also purchases computer parts, assembles them as specified by a customer in a purchase order, and sells them as operating stand-alone computers. All of Granite’s operations take place in State F, which levies a 6% sales tax. Results for the current year are as follows:

Sales of software / $100,000
Purchases of computer parts / 500,000
Sales of computer systems / 800,000
Purchases of office supplies / 10,000
Purchases of packaging materials for the computer systems / 7,500
Purchases of tools used by computer assemblers / 2,000
  1. What is Granite’s own sales tax expense for the year?
  2. How much F sales tax must Granite collect and pay over to the state on behalf of other taxpayers subject to the tax?

1

Acc432.632.Handout2.doc