USA Gross Receipts 1120s

[mparacha]

My client is a cell phone dealer who has a master dealer. He reports only commissions as gross revenue. I believe he should report total receipts when he sells the phone, not just the commissions he gets from the master dealerAny thoughts?

 

[DrStrangeLove]

By total receipts, do you mean he should report the revenue for the sales of the phones themselves as part of his own revenue? He's doing selling the phones as an agent of the master dealer at prices set by the master dealer? And he's not buying and owning the phones directly, and then selling the phones as a reseller at prices he himself sets, correct? I'm just trying to be clear on your client's relationship to the master dealer and what you think he should be reporting.

 

[mparacha]

By total receipts, do you mean he should report the revenue for the sales of the phones themselves as part of his own revenue? He's doing selling the phones as an agent of the master dealer at prices set by the master dealer? And he's not buying and owning the phones directly, and then selling the phones as a reseller at prices he himself sets, correct? I'm just trying to be clear on your client's relationship to the master dealer and what you think he should be reporting.

Thanks for your comments. Yes, he is selling the phones for the master dealer. It appears to be agency contract, which is commission based. But he receives the inventory from the master dealer for display and sales at his retail location. He sells the phones to the end customer. The customer pays him the money, which he deposits into his bank account. The master dealer then withdraws the cash net of his commission. At least, this is what I understood from the conversation. I want to be sure that it is not his inventory for sale. He then pay sales tax on the phones he sells. It looks like ownership based on the structure.

 

[DrStrangeLove]

Thanks for your comments. Yes, he is selling the phones for the master dealer. It appears to be agency contract, which is commission based. But he receives the inventory from the master dealer for display and sales at his retail location. He sells the phones to the end customer. The customer pays him the money, which he deposits into his bank account. The master dealer then withdraws the cash net of his commission. At least, this is what I understood from the conversation. I want to be sure that it is not his inventory for sale. He then pay sales tax on the phones he sells. It looks like ownership based on the structure.

It sounds to me like he isn't selling phones to customers; he's providing phone selling services to the master dealer. The phones aren't the agent's asset at any point. From a GAAP perspective, to recognize the sales revenue from the phones, the agent would have to first recognize the phones as assets on the agent's books. And it doesn't sound to me like the phones ever belong to the agent. There's a bailment while the phones are yet to be sold, but bailments don't transfer title from the owner-bailor to the bailee. If the phones in stock become obsolete and thus unsellable, it doesn't affect the agent's revenue or costs at all. He just returns the phones, and it's like they never existed--no revenue, no expense. Likewise for the funds, the agent remits the sales tax to the state and the sale price cash/receivables to the master dealer. But the agent is only a bailee for the funds, not the owner-bailor of the funds. The agent's contract is complete when the funds/receivables are remitted, not when the phone is sold.

So I don't see why there's a contract on which the agent could recognize sales revenue for the phones themselves under FASB 606. If there's no revenue under FASB 606, I'm not seeing how there's revenue for the sale of phones under the IRC. There's commission revenue for providing a service (selling the phones), to be sure. I might be missing something, but I don't see an argument for including the sales revenue or cost of goods sold on the agent's books.

 

[mparacha]

Thanks for your comments. Yes, he is selling the phones for the master dealer. It appears to be agency contract, which is commission based. But he receives the inventory from the master dealer for display and sales at his retail location. He sells the phones to the end customer. The customer pays him the money, which he deposits into his bank account. The master dealer then withdraws the cash net of his commission. At least, this is what I understood from the conversation. I want to be sure that it is not his inventory for sale. He then pay sales tax on the phones he sells. It looks like ownership based on the structure.

It sounds to me like he isn't selling phones to customers; he's providing phone selling services to the master dealer. The phones aren't the agent's asset at any point. From a GAAP perspective, to recognize the sales revenue from the phones, the agent would have to first recognize the phones as assets on the agent's books. And it doesn't sound to me like the phones ever belong to the agent. There's a bailment while the phones are yet to be sold, but bailments don't transfer title from the owner-bailor to the bailee. If the phones in stock become obsolete and thus unsellable, it doesn't affect the agent's revenue or costs at all. He just returns the phones, and it's like they never existed--no revenue, no expense. Likewise for the funds, the agent remits the sales tax to the state and the sale price cash/receivables to the master dealer. But the agent is only a bailee for the funds, not the owner-bailor of the funds. The agent's contract is complete when the funds/receivables are remitted, not when the phone is sold.

So I don't see why there's a contract on which the agent could recognize sales revenue for the phones themselves under FASB 606. If there's no revenue under FASB 606, I'm not seeing how there's revenue for the sale of phones under the IRC. There's commission revenue for providing a service (selling the phones), to be sure. I might be missing something, but I don't see an argument for including the sales revenue or cost of goods sold on the agent's books.

I appreciate the response. I agree that that the business should be treated as agency where the agent does not bear title to the inventory. He only receives commissions for selling the phones. I am not sure he buys an accessory. Since this is only a tax preparation service, I will take the sales commissions amount reported by the master dealer for the gross receipts and report the normal operating expenses. ASC 606 won't apply. I don't believe the IRC requires a different treatment. I am not sure if I should look at his contract terms with the master dealer. Much appreciated!