An Inventory Question For Dealers And Former Dealers

For the 18 years that I owned both wholesale and retails businesses, I tracked sales via daily totals from the cash registers/computers (and daily bank deposits). My accountants always demanded that I give each customer an receipt, bill of sale, or invoice and that I tracked inventory.

I do not know how you would handle things like returns and warrantee without an invoice/bill of sale (memory? yikes!). A well tracked inventory not only makes dealing with the tax man a lot easier but also helps you control 'shrinkage'. And how would you ever sell a business that had undocumented sales and inventory? It is easy in this day and age to bar code and track retail inventory. Software, printers and and scanners can all be had for a minimum amount of money and the return on investment is measured in months.

The only situation I can see for keeping 'loose' bookkeeping and uncontrolled inventory is if a business owner wanted to dodge taxes or hide income. (Not counting hobbyists who pretend to be dealers.) I think a person would be hard pressed to find a quality CPA who would not lean hard on a business owner to keep good books and records.
Don

Let's say ... you are a topical dealer doing the show circuit with 250-300 red boxes full of 101 cards with a couple hundred thousand stamps priced at 25 and 50 cents each.

How much time can you afford to spend in inventory work and listing individual items on receipts?

Tight inventory control just doesn't happen in real life with most show dealers.

It is done every day in every type business. hardware stores sell screws, nuts and bolts; just last week I purchased 4 nuts and bolts from 'loose stock at an Ace hardware. I took them from loose stock, bagged them, wrote down the stock number. At the front register, they looked up the stock number, enter the quantities, and charged me less than a dollar.

For years I sold tanks of 'feeder goldfish' (and many other fish for pennies) and tracked them all through an inventory system. Grocery stores track and sell things like loose fruit. You simply have a bar code next to the register for these type items. Just because there are large quantities of lower value items does not mean you avoid inventory control.

According to the IRS, the number one thing that differentiates a hobby from a business is;


I think it is fine if a hobbyist goes to a flea market, local stamp bourse, or online to disposition some extra stock occasionally without keeping good books, but an actual business is different in my (and IRS) opinion.
Don

In the shows I attended, I did not see much record keeping by sellers but would expect all show dealers to pay taxes (local, state, etc.). Whether they do or not is another story.

There is no way that a seller that keeps no records of individual sales is remitting sales tax. That hardly seems fair to the sellers that are complying with the law.

By way of background: My day job for the last 16 years included coordinating the typesetting and commercial print production for a 600-800 page annual textbook used in federal tax continuing education. While not a tax professional myself, the team I worked with included CPAs, EAs (IRS enrolled agents), tax attorneys, etc. The issue of hobby vs. business is an issue that is covered on a regular basis.

The aspect Don mentions above is just 1 of 9 factors the IRS considers when determining when an activity is a business or a hobby. While it is listed first in the list, it is not THE factor and none of the 9 factors carry weight over the others:

https://www.irs.gov/faqs/small-busi...ome-expenses

Additionally, not inventorying each individual stamp/coin/baseball card that you sell or have in stock does not automatically mean you are NOT conducting your income-producing activity "in a businesslike manner".

There are numerous ways to calculate and track expenses, income, and inventory, some individually and some in the aggregate. I would argue that what the IRS is looking for is consistency. There is no single authoritative "correct" way for a dealer to track these things, and just because dealer X handles it differently from dealer Y does not mean either is doing it incorrectly.

Also, one cannot necessarily compare stamps (unless they are kiloware/mixture/packet material) to nuts/bolts/goldfish where you can just scan a single barcode or enter a single SKU, as stamps and other collectibles potentially have unique characteristics, differing costs and sale prices, etc. Each stamp of the same type is potentially a different "product" in that regard.

Just from observation, dealers trafficking in smaller numbers of higher-dollar items appear to track sales individually on a per-item basis, where dealers of larger numbers of similar items tend to track things in the aggregate, tracking total revenue coming in vs. total expenses going out rather than trying to track the cost basis of every individual item one by one.

At the end of the day, any method is viable until you get audited.

The point was not about the IRS, the point was about running inventory control and documenting sales. How does a person want their company to come across? Do they want to appear to be a garage sale or a legitimate business? Of course no one is going to bar code every penny stamp, that is inane. But the OP asked about both inventory and sale tracking. Things like giving a customer a receipt is something that protects both parties.

I make judgments about the professionalism of a dealer based upon many things including inventory control and receipts. (I also make judgments if they hand my purchase to me in a USPS envelope or if an online seller uses USPS envelopes as internal packaging. Who exactly do they think pays for this stuff? Do they really think that 'saving a few cents' makes them look good?)

I agree that legitimate business documentation varies. As a person who has actually invested in real businesses, I know that my playing around reselling material online or at a local show is not the same thing.
Don

Edit: In my opinion at the end of the day, ask yourself where you would be if you tried to sell the business. Imagine having a perspective buyer of your business standing at a show with you when a customer walks up and says the package of mounts you sold them is defective, they would like you to exchange it, but that you never gave them a receipt. Or imagine having a perspective buyer pouring through your books peppering you with questions about the breakdown of your sales when you tracked nothing for years.

As government spending increases exponentially you can expect much more tax compliance activity across the board especially at the Federal level. The latest spending bill has a provision for, at a minimum, doubling IRS audit activity. They are going to be looking for every single penny wherever they can find it. It would behoove any seller that files taxes as a seller to be smart about tracking sales in a more granular fashion.

Since I only sell on ebay, I have nothing to do to track inventory, sales, sales tax. I just have to download my sales every once in a while and shove it into a spreadsheet where I keep my expenses to see how I'm doing. I file a NY state income tax form annually but pay zero since ebay does it for me. There are two things ebay doesn't help with: 1) refunds 2) amount paid for shipping. I would think it wouldn't be that hard for ebay to include the amount spent on shipping on their order download, but no. That's the one area I have to fudge a bit, using an average shipping cost for most items.

I was curious about the inventory side of things, but when we enter the tax equation, there's also this. Increases in inventory are viewed by the IRS as income/assets, and are taxable.

I understand how difficult to impossible it would be to keep a complete and total inventory, but I'm not sure how a lighter version "I know what I sold and bought" type system - institutional knowledge I guess - would fly in the face of an IRS audit. Of course, if you can't prove where you started and where you ended, could the IRS or a state agency?

I have a notion that Scott has missed the boat on providing an inventory system for dealers and/or collectors. It would probably be too expensive for many, though.

I've not even been given a receipt at a show in several years, unless I specifically asked for one (and that was purchasing some specific stamps as genuine that were known to be frequently forged).

What hasn't been said here ........Is get professional tax help,don't swing it on your own . Even if you use a professional for one year you will get a life time education . I don't want to go into detail but he was a miracle worker when it came to the I.R.S. ,Worth every penny.

We've moved into "I'm not a tax professional, but I slept at a Holiday Inn" territory. Some opinions given may be valid, some are definitely bogus.

On a similar vein, I learned that if you inherit something (like stamps) and resell them later you have to pay capital gains on the increase in value (if any) from the date of inheritance. The requirement to pay taxes was expected but forces certain work at some point to determine value at a certain date.

Has anyone gone through this?

What !!!! It is never wrong to hire professionals to help you to stand up to the monster that is the I.R.S.

Angore,

Usual disclaimer about this not being considered professional advice and to consult a qualified professional notwithstanding, if there was not an appraisal done at the time of the estate settlement, the IRS considers industry-standard catalogs, e.g. Scott as being sufficient substantiation of value for both capital gains and charitable donation valuation purposes. So you can use the catalogs for the year in which the inheritance occurred. The percentage of catalog value you choose to use for actual value is up to you. The IRS does not determine value; it is up to the taxpayer, assuming they have sufficient documentation.