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Sales Tax and Sales Tax Payable

What is sales tax?

Sales tax is a tax on the price of a good or service. This tax is a percentage of the price and is added by the final
seller.
There are only five states in the United States that do not have a state sales tax. There is little consistency in
how states apply sales tax. Some states only collect sales tax on goods and not services. Some states give
exemptions for items that are considered necessities, like food and clothing. Some states exempt some services
like hair cuts and accounting services. There are a number of accountants who specialize in sales tax regulation
because the laws can be so complicated.

Historically, in order for a company to be required to collect sales tax in a state, the company must have nexus
in the state. Nexus refers to physical presence in the state. That means the company would need to have
buildings or employees in a state in order to have nexus in the state. As the internet and online shopping has
grown, states are losing out on billions of dollars in sales tax revenue. According to Bloomberg, states lose an
estimated $23 billion per year in sales taxes from internet sales. This lead a number of states to pass “Amazon
Tax Laws”. These laws redefined the definition of nexus to include companies with affiliates in a state. An
affiliate is a blogger, website owner, or anyone who posts affiliate links online. When someone clicks on the
link and purchases a product from a website, the affiliate earns revenue. The states argued that these affiliates
are akin to sales people and therefore those affiliates create nexus in the state. Congress is also working on bills
to force large online retailers to collect sales tax in all states. These laws are constantly evolving and
accountants must stay on top of current legislation.

How is sales tax collected?

Sales tax is collected by retailers when goods and services are sold to the final user. Sales taxes are not imposed
when materials that will be used to manufacture a product are sold to a manufacturer. When the manufacturer
sells their products to a retailer, no taxes are imposed. It is only when the product is sold to the final customer
that the taxes are charged. If the sale is not made to the final end user, no sales tax is collect. A few states have
made exemptions to this rule, like charging contractors sales tax on materials.

There are two ways that companies can add sales tax to their products. Most companies add sales tax to the
price of their products. To calculate the amount of sales tax, multiply the sales tax percentage by the total
amount of the sale.

Example #1

A customer purchases $150.00 worth of taxable products from Jeff’s Geek-O-Rama on 2/15. The sales tax
rate in the state the store resides is 6%. Calculate the amount of tax and the total amount the customer paid.
 First let’s calculate the tax. The sales tax is 6% of the total
purchase, which in this case is $150.00.

$150.00 X .06 = $9

That is the total tax on the transaction. This must be added to the purchase price so the total cash collected is
$159.00, but only $150 belongs to Jeff. The other $9 belongs to the state and should be remitted to the state
when the next sales tax return is filed.

When recording the transaction, record the cash that was received, the revenue the company earned, and the
sales tax that is payable to the state.
As the month goes on and more sales transactions occur, the sales tax payable account will grow. Most states
require monthly payment for sales tax collected. When February’s sales tax is due in March, we will look at
how much sales tax was collected and pay that amount.

Example #2

On March 20, Jeff’s Geek-O-Rama pays the sales tax due for February. The store generated $27,250 in
taxable sales in February and has a balance in Sales Tax Payable of $1,635 at the end of the month. Record
the journal entry to record the payment of the sales tax for February.
 This entry is pretty straight forward. It is like recording
any other debt payoff. We are paying down the debt. The normal balance in a liability account is a credit
balance so in order to pay off that balance we would need to debit the account. How are we paying with sales
tax? We are paying it with cash. Cash will decrease which would be our credit. The amount of the entry is
$1,635.

What do we do with sales tax paid on purchases made by the company?

If a business purchases items for the company’s use, like office supplies or equipment, the cost of those items is
subject to sales tax. What does a company do with that sales tax?

If you think back to the asset purchase rules, all costs associated with acquiring an asset must be added to the
cost of the asset. These costs include sales tax. If a company purchases supplies and pays sales tax, the sales tax
is added to the cost of the supplies. If the company purchases a machine and there is sales tax on the purchase,
the sales tax is added to the cost of the machine.

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