Dear Abacus,
My friend and I are in the kombucha business. We’re super excited about it! People have been telling us for years that our kombucha is top notch, so we finally decided to sell it. Right now, we are trying to do some research and development, so we give a lot of our drinks away as samples to friends and family for feedback and to build relationships. Do I need to keep track of the kombucha I’m giving away? I’m not making any money off of it. Is it important to write it down somewhere?
-Generous Brewer
Dear Generous Brewer,
The short answer is yes. The longer answer has a lot to do with where you source your ingredients from and how. You need to remember that whenever you’re producing a product, you’re expected to retail it to your customers. This comes into play when you’re calculating your sales tax.
Thinking about sales tax isn’t fun, but it’s important. If you are creating your kombucha with ingredients you bought wholesale, you didn’t pay sales tax on them when you bought them. After you turn those ingredients into tea, you will sell it to your customers and they will pay sales tax on the tea.
So, usually your customer—or end user—pays the sales tax. But what happens when your customer isn’t paying anything? The end user is no longer the one drinking your tea… it’s you (at least as far as the government is concerned). You will end up having to pay sales tax for the kombucha you give out for free.
The most important thing is track how much you’re giving away. Look into your local government’s sales tax rate. Multiply the cost of producing the kombucha by the tax rate, then multiply that by the amount of kombucha you’ve given away. That is the sales tax you will have to pay.
From there, you can meet with your partner and your financial advisor to make sure that the amount you’re paying in sales tax isn’t affecting your bottom line. Remember, you paid for the ingredients and the labor to make the kombucha, as well as the sales tax on it. That means that you’re paying for every free sample that you give away.
Good luck,
Abacus the Accountant
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