Double Sales Tax

Consider a contractor in NJ that sells residential services.

I'm under the impression that, when billing the customer, labor is subject to sales tax (unless it qualifies as a capital improvement), and parts are not (provided that sales tax was paid to the vendor when those parts were purchased by the contractor.)

One way to write up an invoice is to have two listings, a labor listing and a parts listing. If the contractor wanted to charge for the effort of locating, acquiring and transporting parts, they could just raise their labor listing to account for this effort. The parts listing would be for the exact purchase price plus paid sales tax of the parts (the total receipt for the parts).

What if that contractor doesn't know the exact price they paid for parts. Say they have a habit of overpurchasing parts so to keep some as stock for future jobs.They aren't stocking some elaborate inventory, just buying a little extra here and there because they know they'll eventually use them. When they do get around to using a part, they can't tell by looking at it what vendor they bought it from, so they wouldn't know the exact price they paid for it.

So then what do they tell the customer? In their parts listing on the invoice, the contractor isn't going to underestimate what they paid for the parts. But if they overestimate, now they are actually making a profit on the parts (that is different then the extra labor cost they included in the labor listing). Wouldn't they have to collect sales tax for that part profit? But they don't even know what the exact profit is because they don't know what they actually bought the part for!

It would be much easier to not separate the invoice into labor and parts listings, and just write up an invoice with just one listing for the "service". The service would include all labor and parts, and sales tax would apply to the entire service price.

But in that scenario the customer is paying sales tax twice. If a part was ostensibly purchased by the contractor for P plus sales tax, then P1.06625 was included in the service price, and sales tax was then applied to it. This means the customer ultimately paid P(1.06625)(1.06625) = P( 1 + 2(0.06625) ) + P*(0.06625^2) for the part, not even including the extra labor included in the service price for handling.

So the customer pay sales tax twice, plus sales tax on their initial sales tax. Maybe for small part prices this isn't a big deal. But when part prices get into the hundreds of dollars, this matters.

Is there a solution to this double taxing that doesn't require a resale certificate, or is that the only way? It just seems like it overcomplicates things, having to know sales tax rates from different purchasing locations, and probably needing to store records.

I'm hoping for an answer like, "most contractors do this... it's not perfect but it's close enough and simple to do, and the IRS is okay with it"