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Painter1

FET - markup vs margin

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I have noticed among friends and associates, there is often a misunderstanding of the importance difference between markup & margin. Please find the following verbal illustrations.

NOTE: For the sake of clarity in the following example no allowance for sales tax, shipping and assorted other costs are considered. 

For this example, I make a fishing related product subject to federal excise tax (FET) and want to implement that tax into my pricing.  I decide to sell my product for $4.00 per item before adding in FET.    I know FET is 10%  so I add $0.40 and sell the item for $4.40 apiece .  I have made and sold one thousand items  and now have $4,400. 

I owe FET $440 (10% of sale) leaving me with $3,960.  Dividing that $3,960 by the 1,000 items sold it amounts to $3.96 per item.  But wait a minute.  Remember that part at the beginning “I decide to sell my product for $4.00 per item before adding in FET?”

 Where did the 4 cents per item disappear to? 

Answer: You lost it in your markup.

Consider; if you had marked up the $4.00 item by 11%,  the sale price would be $4.44 ea. and you would end up with the margin you planned.

(10% FET on the $4.44 sale price is 44 cents ea.  Send that 44 cents to the IRS and you have $4.00) note: I rounded off, again, for clarity of principle 

We sometimes forget that when we build from the bottom up, but measure from the top down, we must allow for the difference - Markup vs Margin. 

I hope this is helpful to those of you that are, or plan to be, fishing product entrepreneurs.

 

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When I see markup and margin, I think more like a store.  In our store we mark everything up by 54% (unless market value allows for more) so that we end up with a margin of 35% (profit). 35% + is what it takes to keep the lights on and employees happy!

When it comes to my lure company; everything is priced according to time required to build the lure, parts used, and a fair market value. If I invest the time and $$$$$ to develop and patent a new idea, the market value is determined by what someone is willing to pay for the lure. One does have to consider excise tax while placing a value on their lures, but I tend to assess a market value and let the tax fall where it will.

Keep in mind that excise tax is calculated a couple of different ways:

1- Off of wholesale price. This price has to be the one that you would sell your lures to any store at. My store buys a lot of my lures and I give myself a 5% discount, therefor I pay excise tax based on the price that I would sell to other smaller stores. The rate of excise tax is 10% of wholesale price.

2- Off of retail price. If you do not wholesale your lures, you pay 10% excise tax on 60% of your retail price. You have to establish a retail price and pay tax based on that price, even if you ran a sale and sold the lure 25% off. When one of my staffers purchase a new lure, at 40% off that I do not wholesale, I have to pay excise tax based on the full retail price.

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JLS, can you point me in the direction of the IRS info for paying only 60% of your retail price if you don't wholesale. 

If I understand you correctly, for a company who only sells directly to the customer (which I do), the company doesn't pay FET on 100% of the sale price, only 60%.  If that's correct, the IRS agent who came to my shop when I first started gave me the wrong info.  She told me my sale price is the price I need to pay FET on. 

If I sell a jig for $2.50 on my website, that's the price I pay FET on or $0.25 for that unit. 

Was I misinformed?  If so the IRS has received an extra 40% from me for many years.

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Sorry Eiron, I can't point you to a page on the IRS site that will explain that. The information I have was provided to me by the IRS agent that interviewed me before I received my 637 registration. 

The only thing I can think of is that you've been in this business a lot longer than me. Could something have changed and you wasn't informed? Kind of like them deciding we needed to file our taxes by March 15th, last year, I know I didn't get that memo LOL

Contact the IRS or your accountant, they should be able to help answer any questions.

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This subject makes my head hurt. I've been in business for a short time and I've been paying FET on my retail cost since I don't sell wholesale currently. I was given two phone numbers by my local IRS office to ask for some clarification and both the numbers were disconnected.

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i went to a meeting a few years ago at ICAST and it was about FET.  they said that you pay FET on your lowest established selling price., and they stressed the established selling price to prove you are not trying to get around paying the right amount of tax.

I have a wholesale business and a retail business. I have established prices for wholesale customers. I pay 10% on all of those sales.  I also sell to my retail store at wholesale price with 10% FET added. then when I sell at retail FET is already paid.

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