How to record sales tax

[Beth Leonard]

On Mon, Oct 05, 2009 at 03:00:41PM -0700, Cam Ellison wrote:
>>   
> If you are required to collect sales tax, then you are entitled to  
> deduct sales tax that you pay on goods or services you purchase.  

I'd clarify that this is goods you purchase **For Resale**.  If you
are a retailer and you purchase post-it notes, pay sales tax on those
notes, and then resell them to a consumer with tax, you can deduct
the tax paid (similar to Europe's VAT).  Usually what happens in the
US is that if you are buying for resale, you present your resale
certificate to the wholesaler and you don't have to pay taxes on the
notes when you buy them.

If however, you are a software consultant and you purchase the post-it
notes for consumption within your own company, you cannot deduct
the tax paid on those notes, and it is a crime to buy them tax-free
with a resale certificate.

On your Federal income taxes however, the entire cost of the post-it
notes including tax are a "business expense" in the case of the
software company and a "cost of goods sold" for the retailer (less
sales tax paid if you recouped it on your state sales tax forms
already and in some sense never really paid it as an expense).

--Beth


> You  
> should set up a Liability Account with two sub-accounts, one for sales  
> tax that you collect, and the other for sales tax that you pay.  Among  
> other things, that will give you, in the parent account, the amount that  
> you must remit.  It should look something like this:
>
> Liabilities --
>                   |-- Sales Tax
>                            |-- Sales Tax Collected
>                            |-- Sales Tax Paid
>
> The Sales Tax Paid is called a contra account, because it has the  
> opposite value to the parent account and the other sub-account.  Amounts  
> in Sales Tax Collected will be positive; in Sales Tax Paid they will be  
> negative.  If you enter nothing in the Sales Tax account (you  
> shouldn't), then in the Chart of Accounts you will see that it has the  
> net value of the two child accounts.  You can read more about contra  
> accounts in the wiki.
>
> Cheers
>
> Cam
>
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-- 
Beth Leonard
http://www.LeonardFamilyVideos.com