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  • 3 Facts You Need To Know About Sales Tax

    3 Facts You Need To Know About Sales Tax

    TaxesTuesday, Sales Tax…Expense or Liability?

    With the deadline for sales tax filing and payment being tomorrow which is the 20th of the month for most states, I thought I jump on the band wagon and chat with you about how to classify these transactions in your books. There is typically a fair amount of discussion about whether sales tax is an expense, that can be taken off on your taxes, or a liability. See below for the Sales Tax fact;

    •  Sales tax is NOT an expense so no sales tax expense should be reported on P&L
    •  The amount collected for Sales tax should NOT be included in any of revenue line items. Again, no sales tax revenue reported on P&L either.
    • Sales tax should be kept separately as a liability account on your books reported on Balance Sheet!

    Whew! Now that that is out of the way, lets look at it through the eyes of a 10 year old on the school playground:  Sally told Andy that she would give him three cookies for his juice box. Agnes, the lunch lady, takes a 30% of all cookie revenue that Andy gets from selling his juice boxes.

    SalesTax101 Blog

    Since Andy is collecting the cookies, but owes one out of every three cookies to the lunch lady, basically the third cookie has never been his from the beginning. However, it is his responsibility to collect that cookie from Sally and then give it to the lunch lady at the predetermined times. Therefore this 1/3 of the cookies that Andy collects are not revenue, but are a liability. When he gives the lunch lady her 1/3 of the cookies, he reduces his lunch lady tax payable account.

    Likewise, when you as a business, collect sales tax you are doing it on behalf of the state that your business is located at. This money is not yours and does not positively or negatively impact your bottom line. These transactions are noted on the Balance Sheet in the Sales Tax Payable account. Thus, you never pay sales tax on the amount collected for Sales tax portion because it is not your revenue.

    If you need additional help and support, please do not hesitate to reach out.

    Happy Sales to you!

    Chelsea Auton

    The Volpe Consulting & Accounting Team

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