Harlan Lunsford wrote:
- quote -

Two more notes:
1. Note above I said "Sales tax you collect AND pay
over...." This means that should you fail, forget, or just
plain ignore sending it to the state capital, it IS revenue
to you. And when they catch up with you, you may have a
deduction for the tax you pay at that time, but not for the
penalties they assess. The interest they charge is another
matter. Some would say deduct the interest; others might
disagree.

2. Cities that have a gross receipts tax might take a
different tack, however, and insist that "gross receipts"
in their opinion includes all money flowing into a business
(except loans of course.)

More ChEAr$,
Harlan Lunsford, EA n LA

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Nightcheck[at]cox.net (Rick) wrote:

- quote -

The sales or use tax you collect from your customer is not
revenue to you. It is the property of the state on whose
behalf you collected it, and is a liability to you until you
have paid it over.

In your example, the bookkeeping entry should be debit
accounts receivable for $10,700; credit sales for $10,000
and sales taxes payable for $700. When you pay the tax to
the state, credit cash and debit sales taxes payable for
$700. The tax never hits your income statement.

If you fail to collect tax on a taxable sale, and are
required to pay the tax yourself, that amount would be an
expense to you. Let's say you didn't charge or collect tax
on that $10,000 sale. Along comes an auditor from Company
A's state and says you should have collected sales or use
tax on that sale. Of course your first step would be to
contact Company A to find out if they self-assessed and paid
the tax on that transaction. If they did not, or if Company
A has gone out of business and its owners have flown the
coop, you are liable for the $700 tax. In that case, that
$700 would be an expense to you.

Katie in San Diego
The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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Rick wrote:

- quote -

Sales tax you collect AND pay over to the appropriate state
sales tax people is not income. You are holding it in trust
only , and the cash is reflected also as a liability on your
books. Call it accounts payable if you want to; I call it
taxes payable.

therefore your income is the 10,000$. However don't forget
to record any sales tax discounts (for paying on time) as
income of course, but not in sales; way down below as
other income after operating profit.

ChEAr$,
Harlan Lunsford, EA n LA

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"Rick" <Nightcheck[at]cox.net> wrote:

- quote -

The way you SHOULD report it is as $10,700 revenue, $10,000
income and $700 as a payable. When you pay the $700, it's a
debit to payable for $700 and a credit to cash for the same
amount. It's not income or a deduction, because the money
was never legally yours to do with as you wanted, you were
the trustee for the states money.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"Rick" <Nightcheck[at]cox.net> wrote:

- quote -

Collected tax is a liability (something you owe) not revenue
(something you've earned). You have not earned the money,
you have simply collected on behalf of the state/city. The
transaction should look like this:

When you bill the client:
Accounts Receivable,700 Dr
Revenue 10,000 Cr
Taxes Payable 700 Cr

When you pay the tax:
Taxes Payable 700 Dr
Cash 700 Cr

The only revenue you may have is any collection allowance
the state allows. Most states give you a couple % (limited
by a cap). In that case you credit cash by the amount you
actually paid and book the allowance as revenue.

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"Rick" <Nightcheck[at]cox.net> wrote:

- quote -

You would show $10,000 as Revenue and the other $700 as
Sales Tax Payable, a liability as you said. When you pay
that Sales Tax liability, you would debit that account and
credit your Cash account. You are acting only as a
collection agent for the various States Sales Tax
Departments, therefore that amount collected would not be
listed as an expense of your doing business.

Wayne Brasch, CPA, M. S. Taxation

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In our small business, we do work in several other states in
which we invoice them for materials plus their total
city/state sales tax. The rporting of this is causing us a
bit of confusion.

As an example - we invoice Company A for $10,000 (materials)
and add 7% sales tax for a total of $10,700. (assuming 7% is
te correct percent).

When we account for revenue - do we account for $10,000 or
$10,700? It seems logical (at least to me) we report $10,700
as revenue and $700. of it would be an accounts payable. Is
this correct? If not - could someone explain the process?

In addition - on the income statement - are the taxes listed
as an operating expense once they are paid? If not, once
paid - where is it reported. ?

I know this may seem like a no brainer... but our previous
bookkeeper really messed up our reports and now we need to
insure they are done properly.

Thanks in advance for any assistance you can provide...

Rick

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