Tax accounting for sales tax

[Prepman]

I have always included Sales tax collected in gross income and then subtracted out the amount of taxes paid to the state as an expense. I have a new client and in reviewing the past tax returns the preparer did not include the sales tax in GI nor was and sales tax paid expensed. Is one way or the other correct/incorrect for income tax reporting?

[outwest]

In Idaho

The preferred method:

Cash Dr 1000
Sales Cr 950
Sales Tax Payable Cr 50

This way the sales on the financials match the taxable sales on the sales tax coupon and avoid confusion on a sales tax audit.

Doug

[rosieea]

In Florida, a small collection allowance is applicable, so the entries look like this:

Debit Cash
Credit Sales
Credit Sales Tax Payable
Credit Collection Allowance (an "other income" account)

[Jesse]

Stupid question

What number do you start with on your Schedule C/Form 1065 income tax return?

I would start w/ sales as gross income and deduct sales tax paid if cash basis or sales tax accrued on accrual basis.

Would you start with Sales before tax and add in any discounts as other income and not take a deduction for sales tax expense at all?

I ask too only because I have seen it done both ways.

[Bees Knees]

TTB, page 5-12, Author's Comment: "The treatment of sales tax collected from customers and then paid over to the government depends upon how local law imposes the tax. If the tax is imposed on the seller, then the seller deducts the taxes paid, and includes any taxes collected from the buyer in income. If the tax is imposed on the buyer, the seller does not deduct taxes paid, nor does the seller include taxes collected in income. IRS instructions and publications make the point very clear that when a state or local government imposes the sales tax on the buyer, the seller cannot take a deduction for taxes collected and paid over to the government."

[rosieea]

What number do you start with on your Schedule C/Form 1065 income tax return?

I would start w/ sales as gross income and deduct sales tax paid if cash basis or sales tax accrued on accrual basis.

Would you start with Sales before tax and add in any discounts as other income and not take a deduction for sales tax expense at all?

I ask too only because I have seen it done both ways.

Look at it this way: The collection of sales tax is not income. You are merely collecting it on behalf of the state, and the funds collected constitute a trust fund. When you pay it over to the state, it is not an expense; it is a disbursement from the "trust fund." Accordingly, you should book the income as income, and the sales tax collected as a liability. If you are required to pay less than the amount collected, due to a collection allowance, you can debit the liability account and credit other income for the amount of the allowance.