Tax Help: Sole Proprietorship with multiple layers of customers

[Smokystache]

Short version: Help me figure out taxes based on multiple parties and a combination of goods and services

Ok, I realize this is probably complicated enough that I need to get professional help, but I also wanted to make use of the knowledge on the forums. (This is not a business relationship that I’ve entered …  - yet).

Key players:
a) My soleproprietorship: SmokeySP
b) Partner company: MarketingInc
c) Customers: Veterinary practices, individuals who use veterinary services

This is hypothetical, but close enough to the real situation:
Let’s say SmokeySP created a series of 5 informational letters for pet owners designed to be sent directly to the pet owners over the course of a year (5 letters = my product). SmokeySP decides to partner with a marketing company (MarketingInc.) who specializes in helping veterinary practices market their services. MarketingInc approaches various veterinary practices and pitches their services: (advertising, create/improve your website, etc.) and by the way, MarketingInc has partnered with SmokeySP to provide a service for Vet practices. This service automatically sends your current clients a series of newsletters as a way to share information, etc.

If a veterinary practice wants the newsletters, they pay MarketingInc a fee per recipient (Let’s say $10 for one set of newsletters to one recipient). MarketingInc then pays SmokeySP $8 as their fee for providing the service. Of course providing the newsletters includes printing them, managing the contacts, stuffing the envelopes, buying postage, buying envelopes, etc. Let’s assume that SmokeySP’s direct costs (envelopes, stamps, printing the newsletters) are $3 per contact.

Other details:
- Smokey SP buys the envelopes and gets the newsletters printed out of state and is not charged sales tax by the envelope company or the printing company.
- SmokeySP and MarketingInc are located in the same state; this state has no state income tax.
- Veterinary practices are located in and out-of-state

Questions:
- Who should be charged sales tax?
- What taxes should be paid?
- I’m assuming SmokeySP should pay federal income tax based on the $5 profit ($8 fee minus $3 of deductions to create and deliver the product). Is this correct?
- What other tax considerations are relevant?

[DevoCPA]

Sales tax is collected on the end user so on top of $10for in state sales. For out of state sales you need to determine if you have nexus in that state to see if you need to collect just like Amazon does.

For income tax you'll have to look at each state' s rules to see how you will apportion the income.

Look at Schedule C on your 1040 to determine your Fed tax. Are you a partner in the partnership?

[Smokystache]

Are you a partner in the partnership?

I am not an employee nor a contract worker of MarketingInc. This would purely be a business to business relationship.

Sales tax is collected on the end user so on top of $10for in state sales. For out of state sales you need to determine if you have nexus in that state to see if you need to collect just like Amazon does.

Who would be responsible for collecting the in-state sales tax? SmokeySP or MarketingInc?

Thanks for your help.

[DevoCPA]

Marketing inc

[jwright]

Are these newsletters like pamphlets that I would see available at a veterinarian office?  Or are they mass mailings?  I don't know that the mailings are a taxable good at all; it would depend on the state.  But regardless, you are not selling to the end user so it is not your responsibility to collect sales tax.

If you are just selling to the one customer, who is in your state, you shouldn't have to worry about out of state income or sales tax.

Your income tax would be based on all revenues (your sales price) less all your expenses (variable and fixed).  It will be self-employment income to you, so be prepared for that tax as well as income tax.

[BlueHouse]

An important thing to remember and one that helps you figure a lot of things out going forward:  Remember to differentiate between your customer (the one that pays the bills) and your stakeholders (the ultimate consumer of the information).  Don't get involved in any of the contractual arrangements between the two other parties.  Only be involved in arrangements that directly affect you.   (and don't accept payment terms if they are dependent on someone else getting paid by their customer...you cannot control another party's AR policies).   

So to answer the question about sales tax -- you're not making the sale to the end user, right?  Marketing Inc is?  Then that clears up the sales tax issue. 

[Smokystache]

Thanks to everyone for their comments and feedback!