Taxes for sale of surplus equipment

[unixkernel]

I recently had a friend who gave me the key for an entire storage room of surplus medical and electronic test equipment. He got it from his old employer who shut down. He said there is possible around 50k-100k worth of equipment. Since he lives in another state and I am closer to the equipment he is letting me sell all of it as long as he keeps 50%, the rest is mine. Would the sale of this equipment be subject to sales tax? How would I report this income at the end of the year? And how do I legally give him 50%? I am thinking this could be considered consignment. Can I report 100% of the sales as my income on a Schedule C then simply give him 50% after? Would I have to issue him a 1099?

[xmasbaby0]

Something about this does not smell right.  Why would the "old employer" just shut down and give away over $50K in supplies and equipment to your friend--who wants YOU to be the one to go into the storage facility and get the goods and sell it off?  How do you know your friend came by the key honestly?  Before you get involved in a potential felony, you had better find out more about the situation.  Income tax might be the least of your problems if you get duped into committing a crime.

[unixkernel]

My friend worked for the old company and had a high up position there, it was a medical supplier company. A lot of the equipment was fairly old and he just put it away in storage since his boss let him take some of the equipment that otherwise would of probably just been liquidated and auctioned off for cheap. As for the legality of this I can assure you all the stuff is legally acquired, even at the storage facility he went in to the office with me and handed me the key. Since he lives in a different state then the storage(which has been in storage for like 4 years now) he just wants to get rid of it since its just racking up storage costs so he offered me the opportunity.

[Anonymous]

I would first recommend you see a lawyer in your state.  It seems that you'll be selling used medical equipment.  If so, that raises the question of whether or not you need FDA, State, or other Federal approval. There could be other legal issues and reporting requirements.  

now let's say there are no legal hurdles to selling this stuff.  Without knowing the state where the items will be sold we can't answer the sales tax question.  every state is different.  even in a state the rules can differ at the state, county, parish, and local level. 

i would say you have commission income reportable on schedule C and subject to self-employment tax.  the IRS takes a very broad view of what is a trade or business and for most trades or businesses the net income is subject to self-employment tax. here's the IRS viewpoint:

The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services. It is not limited to integrated aggregates of assets, activities, and goodwill that comprise businesses for purposes of certain other provisions of the Internal Revenue Code. Activities of producing or distributing goods or performing services from which gross income is derived do not lose their identity as trades or businesses merely because they are carried on within a larger framework of other activities that may, or may not, be related to the organization's exempt purposes.

[Opus 17]

Assuming you have legal title to these goods;

1. Whenever you sell property, you have a capital transaction, a capital gain or loss.  You have a capital gain if the selling price is more than your cost basis.  This is reported on schedule D.  It is a long term capital gain if the holding period is more than a year and taxed at a lower rate, and a short term capital gain taxed as regular income if held less than one year. 

2. With respect to a gift, your cost basis is the cost basis of the person who gave it to you, and your holding period is the same as their holding period.

3. If we assume there was legal transfer of title from the company to the friend and from the friend to you, then your friend's cost basis is whatever the company's cost basis was.  If your friend paid for the equipment, that is his cost basis, but his cost basis is not increased by the storage fees he paid. 

4. The company's cost basis is probably zero, because they would have depreciated the equipment as part of the normal business use of the equipment.  

5. Therefore, 100% of your proceeds will be taxable income.  You don't need to report it as a schedule C business for buying and selling equipment, you can report the sales as capital transactions on schedule D.  Report your cost as zero, the holding period as more or less than one year (depending on how long you and your friend together have owned this storage unit), that you acquired the property as a gift.  You can reduce the selling price you report by any fees related to the sale (like an auction commission, or credit card transaction fees) but you can't deduct any other expenses (like the rental of the storage unit, or shipping costs if you pay to ship items to the buyer.)

6. Even if you would like to think that the equipment was not 100% depreciated, the tax code assumes that all income is taxable unless you prove otherwise.  So if you are audited, the IRS will assume the cost basis of the equipment is zero unless you can get hold of the supplier's financial records.

7. You might be able to report your sales of this equipment as a schedule C business if you are involved in an "ongoing trade or business" where you intend to make a profit, you advertise, and do other businesslike things that businesses do.  If you report this on schedule C, you can deduct all your expenses, including rental on the storage facility, eBay listing fees, shipping, and so on.  The sales proceeds will still be taxed as capital gains items, but you will also pay 15% self-employment tax on your net profit.  Which way is better is something you would have to test.  Having self-employment income will go to your social security account for retirement credits, and may give you eligibility to make IRA contributions and do a few other things.

8. However, since you are not going to make a business out of buying and selling storage units generally, you just want to dispose of this one, the schedule C route could be seen as improper by the IRS, as it is not really your "ongoing trade or business" and is more like a one-off source of income or hobby, that would only be reported as capital gains on schedule D. 

[Opus 17]

I am less convinced than my colleague above that this should be a schedule C business, although it is a valid point of view.

Whether or not to collect sales tax and how to remit it to your state is something you would have to consult with them about. 

[Opus 17]

I just saw the 50/50 provision, sorry. You need more information.

9.  If you have title to the property, you owe tax on all the capital gains.  If you pay your friend some of the proceeds, that is a tax-free gift and does not change the amount of tax you owe.  

10. I can think of three ways to pay your friend, an easy way, a middle way, and a hard way.  

• The easy way is, you own the property exclusively, you sell it and pay all the tax on your personal tax return, and then you gift him 50% of the proceeds after tax.  
• The middle way is you buy the equipment from him up front for half its fair market value (or some other agreed upon price).  He pays income tax on his capital gains (difference between the selling price and his cost basis, which is zero.)  When you sell the property, your capital gain is the difference between the selling price you received and the price you paid to your friend. However, your holding period will reset if you do this and if you hold the property less than one year, your gain will be taxed at a higher rate.  You also might not be able to sell the property for what you think and end up short.
• The hard way is, you form a partnership where the partnership owns the property.  The property is sold in the name of the partnership, and the partnership splits the proceeds among the partners.  The partnership does not have to be incorporated (such as an LLC) but it does need to file a separate partnership tax return.  This is a form 1065, and it is due March 15 of each year, 1 month before the regular April 15 tax deadline.  The partnership tax return will list the income and expenses of the partnership and generate a K-1 statement for each partner, that goes on the partners' personal tax returns where they will pay their share of the partnership's income taxes.  If you do this, you may want to pay to see an accountant ahead of time so you don't get into trouble accidentally. 

11. The worst way to handle this, in my opinion, will be to treat it as a consignment business.  If you do that, you will pay ordinary income tax on the difference between the selling price and what you pay to your friend.  Your ordinary income tax rate could be 22% or higher while the capital gains rate is 15% for most people.  On top of that, you will pay 15% self employment tax.  And on top of that, you would be required to issue a 1099-MISC to your friend if you paid him more than $600, and he would have to pay regular income tax, instead of capital gains tax or no tax as in the other methods. 

[rjs]

I don't think you are receiving or giving any gifts. It's not clear whether your friend is actually giving you title to the equipment, but if he is, it's not a gift. He's giving you the equipment in return for 50% of the proceeds from selling it. That's not a gift, it's a purchase. You're paying him for the equipment. And if you and your friend have an agreement that you will pay him 50% of the proceeds, your payment is not a gift to him. It's a contractual obligation, even if the agreement isn't in writing (although ideally it would be).

You need to clarify the ownership of the equipment, and the business agreement between you and your friend. You should probably consult a lawyer and a tax professional before you proceed any further with this project.

[rjs]

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@unixkernel wrote:

Would the sale of this equipment be subject to sales tax?

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As HACKITOFF said, every state has different sales tax rules, and in many states there are also local sales taxes. The rules that apply are the rules for the state and locality where you deliver the equipment to the buyer. If you deliver portions of the equipment in different states, you have to check the sales tax rules for each state where a delivery is made, and for any locality that has a local sales tax.

[rjs]

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@unixkernel wrote:

Would I have to issue him a 1099?

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Starting this year, 2020, nonemployee compensation that used to be reported in box 7 of Form 1099-MISC will be reported on Form 1099-NEC instead. You are required to issue a 1099-NEC to report payment to a person for services, not payment for goods. When you clarify the ownership of the equipment and the contractual agreement with your friend, it should then be clear whether you are paying him for his services (which would require a 1099-NEC) or for the equipment (which would not require a 1099).

[unixkernel]

So, I'm considering doing this as a sole proprietorship and paying Utah sales tax if it sells in Utah, other states would be handled by Ebay. I then plan on reporting this on Schedule C as self-employment in come then paying the 50% left to my friend. Since its merchandise and not a service I should not have to issue a 1099-NEC, right? Does my course of action seem OK? I just don't want to get in trouble with the IRS.

[Opus 17]

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@unixkernel wrote:

So, I'm considering doing this as a sole proprietorship and paying Utah sales tax if it sells in Utah, other states would be handled by Ebay. I then plan on reporting this on Schedule C as self-employment in come then paying the 50% left to my friend. Since its merchandise and not a service I should not have to issue a 1099-NEC, right? Does my course of action seem OK? I just don't want to get in trouble with the IRS.

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It may not be the lowest tax strategy for you.

You would want a formal contract between you and your friend in which your friend consigns the goods to you for a specified period of time (it could be renewable) and that your friend remains the owner until the goods are sold or reclaimed by him if the sales are unsuccessful.  The contract should also specify whether the amount you pay (50%???) is of the gross sales, the net selling price after expenses like sales tax and shipping, or something else, to avoid all future misunderstandings.  (If you paid 50% of the gross, then after your taxes and expenses, there might be very little left for your efforts.)

You would act as a consignment seller, all your income is reported as ordinary income (no capital gains since you don't own the items). Your gross income is the gross amount you collect from the seller, your cost of goods sold is what you pay to your friend.  You can deduct ordinary and necessary business expenses including sales tax, listing fees, credit card transaction fees, shipping, and so on; and you pay income tax and SE tax on the net profit to you.  If you pay your friend more than $600, you issue a 1099-MISC (not a 1099-NEC).  You should have your friend fill out and give you a W-9 form.  Your friend would be responsible for his own taxes, it doesn't concern you how he reports this income.

I don't see anything wrong, but it may not be the lowest tax strategy available to you. 

[Carl]

A few issues I see here.

1) In many states, only a licensed authorized wholesaler or retailer can sell certain types of medical equipment. So if that's not you, there is the high probability of legal issues that could cross the line of being criminal. For example, the selling of x-ray equipment must be done by either an authorized retailer/whole seller, or an individual who has been licensed to use that x-ray equipment and their license is still valid. A medical professional would probably be licensed to possess and use x-ray equipment. Heck, in my state you can't even sell it to or give it away to a recycler for scrap if you're not licensed for it in some way. So you should seek legal advice from at least your county on this.

2) Sales tax is a local issue, and has nothing to do with income tax. Most states and even lower level's of government within a state impose a sales tax on the sale of physical product.  So you'd have to check will all potential taxing authorities to see if a sales tax is applicable here.

3) For most outdated equipment, and especially x-ray equipment, if it's not digital nobody will buy it. But as mentioned above, selling it for scrap isn't like taking your old washer/dryer to the scrap dealer and dropping it off. There can be lots of paperwork involved just to throw it away.

The reasons I point out the above is because my wife works for a dentist, and they had to go through "a lot" of paperwork to get rid of the old analog x-ray equipment, as well as the old analog dental chairs and other medical items used in the dental profession.

he just wants to get rid of it since its just racking up storage costs so he offered me the opportunity.

It honestly sounds to me like you're being taken advantage of, because of your lack of knowledge on the transfer of ownership of medical equipment.  I find it difficult to accept that he would "give" you what is potentially thousands (if not tens of thousands) of dollars of medical equipment with no strings attached; even if it is over 4 years old. Were I in your shoes, I'd give the storage locker key back with a "thanks, but no thanks" and walk away. Remember, there's no such thing as a free lunch.

[Rick19744]

Aside from all the other issues discussed (legal, sales tax, etc), from a purely income tax standpoint, there are tons of issues in this transaction:

• The medical equipment is "technically" your friends since it was his former employer that owned the property and he somehow magically ended up with it.
• Since this equipment is technically his, him receiving the equipment should have been accounted for in some type of a transaction.  The facts don't provide what type of entity the "old" employer is and this impacts the tax implications of this part of the transaction.  
• So now we get to the point of what is the basis in the property that your friend has.  And now what type of property do we have here?  Inventory that we are trying to sell?  I am not sure I can reach the conclusion that this is a capital asset that produces capital gain.
• Now we get to the facts that say he will allow you to sell the property, BUT he wants 50%.  So now you have a partnership that is 50/50.
• With the partnership, your friend technically has now contributed all of the property to the partnership.  As noted above, your friend put in assets with a FMV of $XX and you contributed nothing.  Essentially you are receiving an interest in the partnership that if you liquidated today would provide you with 50% of the liquidating proceeds.  This is a taxable event to you; i.e. a capital interest.  The value of that would need to be determined.
• And now your friend has contributed property with a FMV that most likely exceeds his basis which must be accounted for under Section 704(c); built-in gain property.  What this means is that if the property is sold for the FMV or lower, all income needs to be allocated to the contributing partner; your friend.
• This "simple" event is way more complicated than you think it is.  It not like it is a garage sale where you are selling something for way less than what you originally paid for it.  
• Finally, since this is your friends property, he can't shift income tax consequences, without tax impact.  The only way is for your friend to sell the property, pay the tax and then gift you 50%.  Yes, I do know you stated your friend is in another state, but you could sell the property on his behalf.  But this still does not address what his basis is in the property, probably zero since I am sure that it was not handled correctly when he took possession.
•  As has been stated and I will reiterate, I would seek legal counsel on the many issues involved and you need to make sure that the legal counsel understands tax law as well or has a partner that can provide counsel.