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Is sales tax an expense or a liability?

Posted By anshuman September 29, 2021

sales tax collected by a company is normally reported as

If you think your business may owe taxes, a sales tax amnesty program or voluntary disclosure agreement (VDA) may be available. It is not only time-consuming, but also takes lots of resources as the process can take from a few weeks to several months. This sales tax audit guide can help indirect tax teams avoid common audit triggers and manage the sales tax audit as smoothly as possible. Check with your state to see when you must pay the sales taxes you’ve collected. In most states, you must pay monthly if you have a high volume of sales, but at least quarterly in almost every state.

Businesses can register with their state by completing a one-page form usually available from the state’s revenue department. The form requires basic information about the company, such as name and location. In most cases, this is all that’s necessary to register your business for sales tax purposes.

  • The auditor’s goal is to increase revenue for the state and apply penalties when a business owes taxes.
  • It’s essential to make sure you are keeping up with your quarterly reports to make sure you don’t run into issues when working with investors.
  • Managing your tax obligations isn’t easy and non-compliance – unintentional or not – can result in serious consequences for your business.
  • The sales tax is then remitted to the state or local government within a prescribed period.

However, most states allow some exemptions from sales tax, usually based on the type of item sold (or service provided) or upon some characteristic of the purchaser. As the business owner, you are responsible for knowing what items are taxed at which rates. However, in most cases, the purchaser must affirmatively establish his or her right to claim the exemption. For example, the purchaser may provide evidence that he is making the purchase for a tax-exempt organization.

Keep Records on Sales Taxes Collected

Therefore, if you’re already operating at a minimal profit margin, you’ll want to analyze whether the increased costs will be offset by the additional revenues. In recent years, most states have stepped up their attempts to require out-of-state retailers such as mail-order sellers and telemarketers to register for the purpose of collecting their use taxes. A state can’t compel you to register or to collect its use tax unless you have established a physical presence within the state.

sales tax collected by a company is normally reported as

Depending on the state, such document may be referred to as a “permit,” “license,” or “certificate of registration.” Knowing how to pay taxes for a small business is complicated and, with the continually changing world of sales tax regulations, can quickly lead to a headache. If you know what the authorities are looking for, your business can take steps to reduce the chances of being audited. If someone wants to buy from you and says they are a “reseller” or that they are buying for “resale,” they need to show you a valid reseller’s permit. Make sure to keep a copy of this permit in case you are questioned by state sales tax agents.

Is sales tax an expense or a liability?

The auditor’s goal is to increase revenue for the state and apply penalties when a business owes taxes. If your business is selling in Alaska, Delaware, Montana, New Hampshire, or Oregon, no sales tax is charged, so you don’t have to worry about this process (at least for those states). State A can’t impose its sales tax on your camera purchases, because those purchases were made outside the state. However, State A can subject the cameras to its use tax once you bring them into the state.

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Sales tax permits never expire in some states but must be renewed every one to five years in other states. Collecting and reporting sales tax is a confusing time suck for many small business owners. It has to be done, and it has to be done right, but the requirements are so vast and varied that it can quickly become overwhelming. If you need to collect sales tax, you’ll also need to collect and report sales tax. Here are the steps that you need to follow to file sales tax in your state. In this situation, the sales tax is not an expense and it’s not part of the business income.

Corporate & business organization

In most states, the fee imposed to obtain a sales permit is nominal. However, you may be required to furnish a deposit or a surety bond as part of the registration process. Many states require new sellers to post such deposits or bonds to secure the timely payment of their taxes. Small business owners are required to charge and collect sales tax in certain situations. Knowing when and how to charge can be one of the most confusing aspects of running a small business. If an IRS audit finds that your business has not collected and paid the appropriate sales taxes, you may be subject to substantial penalties and interests, as determined by state policy.

You can also use your purchase invoices to guide what to include on the sales tax report. Remember that if you are using both an invoice number and a receipt number on your invoices, they will also be included in your sales tax report. Sales taxes are taxes imposed by the state, city, county, or other local government on goods and services. If you remit more tax than you actually owe, either because of a clerical error or because of a misinterpretation of the law, a state will generally refund the excess payment. However, if the overpaid tax was collected from a purchaser, most states will require proof that you reimbursed the purchaser for the overpaid tax as a prerequisite to providing the refund.

  • Sales taxes are common in the United States, where each level of government may charge an additional percentage of gross sales.
  • Sales taxes are closely related to use taxes, which apply to items from outside their jurisdiction.
  • Sales tax report helps you to identify the areas where your business is lacking or making mistakes.
  • In most states, sales tax kicks in when there is a triggering event.

The Tax Foundation thinks broadening the sales tax base is the way to go. Nonetheless, while most goods are subject to sales tax in all states with a sales tax, many services remain exempt from sales tax in many states. If a business buys any items from its vendors and pays a sales tax on these items, it charges the sales tax to expense in the current period, along with the cost of the items purchased. It’s charged as a percentage of the selling price and is collected at the time of the sale. If you’re selling on a state-by-state basis or selling products that you ship to a customer from a different state, you need to know your sales tax rate. Once you’ve decided when to file your sales tax report, it’s time to gather the required information to complete the process promptly.


At present, a similar standard applies with respect to telemarketers and to retailers who sell over computer networks and the Internet (so-called “cybersellers”). The most common pain points for small business owners are concerns that come up again and again. While you can’t avoid paying sales tax, you can find a comprehensive solution that makes how you deal with taxes smarter and more efficient.

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Learning the ins and outs of sales tax is necessary for maintaining good business practices. This platform works exceptionally well for all the small businesses that are being set up or need some help, especially in accounting. Sales tax is collected on the state level, so the best policy is to check your state’s website for information on how to figure out what you owe. If your home state has an address verification service, they may be able to tell you automatically whether or not you owe taxes on an item without you needing to file anything. We’re using the term “sales permit” here in a generic sense to refer to the document a seller must secure before making taxable sales in a state.

Payroll, compensation, pension & benefits

This exemption typically doesn’t require sales taxes for businesses that have less than $100,000 in annual sales or fewer than 200 transactions a year. Basing a remote sales tax obligation on economic activity is known as economic nexus, and every state with sales tax now has an economic nexus law. Sales taxes are imposed by the government on the sale of goods and services.

Replacing end-to end manual processes with a suite of automated indirect tax solutions minimizes the potential for human error and omission and ultimately reduces operating costs. Tax technology can also reduce the risk of an audit, saving your business time and the need to pay costly penalties. how to convert accrual basis to cash basis accounting If you are audited, indirect tax software enables you to respond to audits faster and more accurately. If your business has been selected for an audit, consider using a specialist, such as a CPA, a sales tax expert, or a tax professional who specializes in state and local taxes (SALT).

This is a tax on each company’s gross margins, rather than on the end user. Conversely, some products carry special taxes, known as excise taxes. “Sin taxes” are a form of excise tax, such as the local excise tax of $1.50 New York City charges per pack of 20 cigarettes on top of the State excise tax of $4.35 per pack of 20 cigarettes. States may tax services related to tangible personal property, like car repair, but not professional services, like accounting. They may tax some personal services, like tanning, but not others, like therapeutic massage. Amusement and recreation services can be taxed differently than services performed on real property.

Since the business is collecting sales tax on behalf of tax authorities, the tax is not recorded as a part of the revenue. Sales tax rates vary based on the type of product and the location where you sell it. The best time to complete the sales tax reports is when you have completed the quarter.

Definition of Sales Taxes

Working with a trusted sales tax advisor or automating tax calculation can help. For example, wholesalers who sell to resellers with valid reseller license should check the sales tax laws in their state as these sales are usually exempt from taxes. It’s important to keep a record of these transactions along with the reseller’s sales tax certificate for audit purposes. If your business sells products or services on which sales taxes are levied, you will need to set up a system, collect, and pay sales tax on a timely basis.

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