What expense category is Sales Tax?

Sales tax is a consumption tax imposed by governments on the sale of goods and services. While it's collected by businesses from customers, it's ultimately the customer who bears the cost. This makes sales tax a unique expense category for businesses, as they act as intermediaries between the customer and the government.

How to Account for Sales Tax?

Sales tax is a consumption tax imposed by governments on the sale of goods and services.  While businesses collect sales tax from customers, they don't get to keep it.  Instead, they must pay the government for it.  This makes sales tax a unique expense category for businesses, as they act as intermediaries between the customer and the government.

Here's a breakdown of how businesses typically account for sales tax:

1. Collection: When a business sells goods or services subject to sales tax, it collects the tax from the customer in addition to the selling price.
2. Liability: The collected sales tax is not revenue for the business. Instead, it's recorded as a liability on the balance sheet. This liability represents the amount the business owes to the government.
3. Payment: The business periodically pays the collected sales tax to the government, usually on a monthly, quarterly, or annual basis, depending on the jurisdiction.
4. Liability Reduction: When the sales tax is paid to the government, the liability on the business's balance sheet is reduced accordingly.

It's important to note that this process applies to sales tax collected from customers. When businesses purchase goods or services for their own use and pay sales tax, the tax can be included in the cost of the item or service.

Examples of Sales Taxes

Sales taxes can vary depending on the jurisdiction and the type of goods or services sold. Some common examples include:

State Sales Tax 

Imposed by most states on retail sales. Imagine you purchase a $100 item in a state with a 6% sales tax. The calculation would be:

Sales tax = $100 x 0.06 = $6
Total cost = $100 + $6 = $106

Local Sales Tax 

Imposed by some cities or counties in addition to state sales tax. Now, let's say you buy the same $100 item in a city with an additional 2% local sales tax on top of the 6% state tax. The calculation would be:

State sales tax = $100 x 0.06 = $6
Local sales tax = $100 x 0.02 = $2
Total sales tax = $6 + $2 = $8
Total cost = $100 + $8 = $108

Use Tax 

Imposed on the use of goods purchased out-of-state without paying sales tax. If you purchase a $500 item online from a retailer in a different state with a 5% sales tax and your state also has a 5% use tax, you would owe:

Use tax = $500 x 0.05 = $25

It's important to note that sales tax rates and regulations can vary significantly between jurisdictions, so it's crucial to understand the specific rules in your area.

How to Classify Sales Tax Expenses?

Sales tax can be a bit tricky to classify because it depends on the purpose of the purchase.

• Purchases for Resale: If you're buying goods to resell, the sales tax you pay is not a separate expense. Instead, it gets added to the cost of the goods. For example, if you buy a $100 item with $6 sales tax to resell, the total cost of that item is $106.
• Purchases for Business Use: If you're buying goods or services for your own business use (not for resale), the sales tax you pay is considered part of the expense. For example, if you buy office supplies for $50 with $3 sales tax, the total expense is $53.

Tax Implications of Sales Taxes

Here's the key thing to remember about sales tax and taxes:

• Sales Tax Collected: The sales tax you collect from customers is not considered income for your business, so it's not taxable. You're simply holding it on behalf of the government.
• Sales Tax Paid: The sales tax you pay on business purchases is generally not deductible as a separate expense. This is because it's already included in the cost of the goods or services you purchased.

It's important to keep accurate records of all sales tax collected and paid, as you'll need this information to file your sales tax returns.

How Fyle Can Help

Fyle is an expense management software that helps businesses automate expense tracking and coding. It automatically extracts information from receipts and invoices to ensure accurate categorization and tracking, which helps businesses comply with IRS rules and avoid mistakes. This saves time and makes tax preparation easier.