By Andrew Johnson CPA

Some states are just grinchier than others. You try to just give away stuff and the state still wants taxes on the goods given away. Maybe Santa is already aware of these laws and he already has a use tax payment plan in place, but maybe he has no idea of the liabilities he could be incurring. Companies usually know about income tax problems, but often miss the bigger sales and use tax liabilities. Santa is probably no different.

This article in Forbes caught my attention: Why Santa Won’t Owe Any Income Taxes. And he probably has no worries when it comes to state income taxes either. But that doesn’t mean he’s off the tax hook. Talk about keeping a list and checking it twice. He also needs to be an expert on sales and use taxes.

They say Santa makes most of his own toys right there in North Pole, Alaska, but I’m guessing he buys a lot of it online these days also. It’s just so much easier. Maybe his strategy is to buy most gifts online and have it shipped to his shop in Alaska. Alaska does not have a state sales tax. That’s all good, but once he leaves Alaska and starts making deliveries and assembling the toys in homes either by himself or using “agents” he may very well have a use tax problem. Rudolph solved the “storm of the century” problem he had one year, but a big use tax liability could put him right out of business.

In my case, he not only bought a certain bike online but had it drop-shipped to me a week before so that I could help him get it assembled in time for Christmas morning. (Maybe in this case, I’m no different from a school teacher in Tennessee passing out some catalogs for Scholastic Books?) Drop-shipping goods to others and using elves and Moms and Dads and other “helpers” or “agents” creates all sorts of sales/use tax issues for Santa. It’s possible the drop-shipper has nexus themselves in the ship-to state and they themselves have to charge sales tax to Santa. They may even have to tax Santa on the retail value of the goods being shipped. Drop-shipping is a sales tax nightmare, which is probably why our drop-ship tax charts are always popular.

Drop-shipping tax issues aside, Santa may owe use tax on all the giveaways. Many states assess use tax on the value of inventory given away, which we call the Grinchiest States.

If you take Kelly’s figures and say that Santa gives away $142.5BB in gifts each Christmas and say half of that amount is for taxable materials and say that the average use tax rate to apply is 7 percent, you arrive at a $5,000,000,000 potential use tax liability for last year alone.

If he didn’t pay that in past years, then he’d have multiple years of tax liabilities staring at him. But never fear. PJCo could help him too. We just need to help him take advantage of various amnesty and voluntary disclosure remedies that are available. He’d take a little hit financially, but he doesn’t need to go out of business altogether.