USA Piggybacking wholesale orders with others

[stanima]

So I am a sole proprietor online bullion dealer. I buy mostly from a few large wholesalers and in order to meet minimum quantities will sometimes ask other coin dealers here in town if they need anything and add that to my order. Because I am online with no storefront I am not in competition with the local guys so none of us have any problem with that.

I am wondering if I am treating these transactions correctly. I will issue my check (or wire transfer, however settlement is made) and the debit entry is to purchases. When I receive payment from the dealer piggybacking on my order I credit that in my books to purchases, offsetting the amount on the wholesaler's invoice that they purchased.

I was thinking I should write those receipts up as sales, but because there is no markup on these transactions it messes with my gross profit percentages. I typically do $200,000 in sales per month, probably receive another $30-50k in offset receipts from these types of transactions.

If the IRS gets its way and starts getting total deposit and disbursement info on bank accounts my cash flows will be way higher than the amounts I show on my tax return and raise some flags.

I believe I am accounting for these transactions correctly, but am I really?

Thanks for any input.

 

[Praz Finpoint]

Well to say that you do not get any margins and profits from this arrangement whereby coin dealers piggyback on your orders is not entirely accurate. Technically you have this arrangement in place to meet a certain minimum order quantity, without which the cost you have had to pay, for not meeting the minimum order quantity, will be higher. So there is form of return here.

But in view of the size of your business, the above is quite complex and not worth getting into a discussion about.

In order to assess correctly whether you need to record the Gross Sales and Cost of Sales in full for the piggybacked orders:

1. Do you determine and can control the price at which the coin dealers can buy? Yes or No
2. Do you hold an inventory risks? For example the final goods delivered, can the coin dealers reject these goods if they are not satisfied with the goods and you have the absorb the goods? Yes or No
3. Do you absorb any risk of losses from non-payment? For example, say after you buy the stocks and give the stocks to the coin dealers, in the event the coin dealers do not pay you, will you bear the risk of these losses? Yes or No

If the answer is No to all the above, then you are in an Agency relationship, and do not record the Gross Sales and Cost of Goods Sold of the piggyback deals on your Profit & Loss but only record the net margin, if any, you make from this deal on the Profit & Loss.

If the answer is Yes to any of the above, then you are in Principal relationship and would need to record the Gross Sales and Cost of Goods Sold of the piggyback deals on your Profit & Loss.

 

[stanima]

Thank you. The answer to all those is technically No.

Coin dealers are a very tight-knit group and very much self-policing. If a dealer fails to deliver or pay, word gets around and that person will soon find no-one will deal with them again. So if someone failed to pay me I would own the goods, but that guy would never do business with anyone again.

Cheers!