Tax Considerations for Secondhand Dealers – The Margin Tax

Buying used goods and refurbishing them for resale is a common business model. Secondhand dealers are particularly active in the buying and selling of art, antiques, cars, and jewelry. Selling used products can generate significant revenue. However, business owners should be aware of a specific tax rule when dealing in these goods. The so-called margin taxation is an essential tax provision for the majority of second-hand dealers. If this model is not utilized, there is a risk of double taxation.

The Secondhand Goods Trade – What Is the Tax Issue?

When we speak of the second-hand goods trade, we mean that an entrepreneur purchases goods from a private individual and resells them at a later date at a higher price. In principle, this is a classic business model, but it poses a problem with regard to sales tax. To understand where the problem lies, we need to briefly discuss sales tax. Fundamentally, sales tax is about taxing the value chain or the increase in value. With a “new” product, several steps are often involved before the product reaches the end consumer. For example, raw materials are first sold, then processed by another business, and subsequently refined by yet another business, before finally being sold to an end customer. Sales tax must be paid on every sale in this chain. However, it is not intended that sales tax be paid multiple times. Therefore, businesses in the value chain are reimbursed for the so-called input tax. Finally, the sales tax is passed on to the end consumer (customer). This completes the taxation process. If you need further information on sales tax, we refer you to our article on this topic.

So what is the problem with the sale of used goods? As a rule, used goods are purchased from a private individual. Since the goods are not purchased from another business, the second-hand dealer cannot claim input tax. However, the dealer must still report sales tax when selling the used goods. The result: double taxation occurs because the sales tax system has been “interrupted.” This double taxation is not only burdensome for the dealer but is also undesirable under tax law. Therefore, there is a special tax provision for these situations.

Differential taxation for second-hand goods dealers

The solution to the problem of double taxation is found in Section 25a of the German Value-Added Tax Act (UStG). Margin taxation always applies when double taxation would occur upon the sale of used goods. Under differential taxation, the following principle applies: VAT is only payable on the difference between the purchase price and the selling price!

Differential taxation corrects the dealer’s tax situation as if an input tax deduction had been made. Differential taxation is of interest to all business owners who deal in used goods. You do not have to deal exclusively in used goods. It is entirely possible to sell a mix of new and used goods and still utilize differential taxation for the used goods. However, it is important to note that the sale of used goods must be part of the business model. A good example here is a car dealer who sells new cars but also buys used vehicles to resell them later at a profit.

What should be considered regarding the margin scheme?

With regard to margin taxation, there is a certain restriction regarding the goods. Margin taxation can generally be applied to all used movable tangible items. Accordingly, margin taxation does not apply, for example, to buildings, real estate, securities, or stocks. The sale of individual parts is also not covered by this special taxation. So, for example, if a used car is “stripped down” and the parts are subsequently sold, margin taxation is not possible. It also cannot be applied to gemstones or precious metals. The sale of “used” rubies, sapphires, or emeralds, gold, silver, platinum, etc., is therefore not included in the margin scheme. However, if the metals and gemstones are incorporated into a piece of jewelry that is sold used, the margin scheme can be applied.

The question, “What exactly counts as used?” is also frequently asked. Fortunately, there is a simple solution for business owners. It is not a matter of whether an item was actually used by the previous owner. To be eligible for the margin scheme, it is only important that no input tax could have been deducted previously. It therefore does not matter whether the goods are still in new condition and may not have been “used” at all.

Calculating the Tax Using the Margin Method

Once it is clear that differential taxation can be applied, calculating the tax is not particularly complex. Taxation is based on the difference between the selling price and the purchase price. Therefore, the purchase price must be subtracted from the selling price to obtain a tax base. It is important to note that sales tax must not be included in this base and must therefore be excluded. Sales tax is then calculated on the resulting tax base and must be remitted to the tax office.

This basic procedure will apply in most cases. However, there are exceptions. For works of art where a purchase price cannot be determined or is less than 500 euros, the so-called flat-rate margin is used as the tax base. This “fictitious” purchase price amounts to 30 percent of the selling price. Another special rule applies to all goods with a purchase price under 500 euros. For these goods, the difference method can be used for all purchases made in a single year. This is referred to as a total difference. This can be particularly useful when selling many low-cost items.

Invoices and Records

If differential taxation is to be used, it is important to note that no sales tax may be shown on the outgoing invoice for the sale. This is also not permitted if the buyer is entitled to a tax credit. If you do show the sales tax, you must pay it to the tax office, which undermines the fundamental logic of the margin scheme.

As with all tax matters, it is important that you maintain records for the margin scheme. If the tax office asks questions at a later date, you should be able to demonstrate how you calculated the tax base. In this regard, sales prices, purchase prices, and the calculated tax base are important.

Tax Advisors in Düsseldorf and Oberhausen

Differential taxation is useful and important for nearly every secondhand goods dealer. If you operate a business and sell used goods, you should always stay up to date on this matter. Furthermore, it is essential for every business owner to have the company’s tax affairs under control. We know that it can often be difficult for business owners to correctly fulfill their tax obligations. There is simply a lack of time and the necessary expertise. Therefore, it is always a good decision to consult a qualified tax advisor. With our offices in Düsseldorf and Oberhausen, we are happy to provide you, as a business owner, with comprehensive advice. Our team of qualified tax advisors ensures that you always stay up to date on tax matters and that no mistakes are made. Contact us to schedule an initial consultation.