Do I count sales tax I collected as income in my small business?

[MinhT · Accepted solution]

Yes, you include sales tax collected in your income.

Sales tax paid to the taxing authority is claimed as an expense.

[DEOB]

No.  Sales tax is a liability neither income or an expense. You are collected it on behalf of the government. It is the government money not yours.

Read this article:

https://www.accountingcoach.com/blog/are-the-sales-taxes-collected-by-a-retailer-included-in-its-sal...

https://www.accountingcoach.com/blog/sales-tax-liability

[Critter]

Actually either answer is correct as long as you're consistent in your bookkeeping. so if it's easier for you to enter in the gross income including the sales tax and then expensing the sales tax then do it that way. Otherwise if your bookkeeping allows you to pull the sales tax from your gross and only enter the net income and leave the sales tax expense blank.

[Carl]

I recommend you include *ALL* business income in the gross business income. Then you include the sales tax paid to the taxing authority in the amount on line 23 of the SCH C. Remember, states are not the only taxing authority that can impose a sales tax. Such a tax can be imposed at the county level, city level and even township level. By including the taxes collected in your gross business income you can then itemize them for the type of tax they are in the "Taxes and Licenses" section of the program. Then should you ever be audited by a lower level taxing authority you have yet another paper trail to reinforce your position on weather you paid those taxes or not, and if the amount paid was correct or not.

The "Taxes and Licenses" data entry category is located in the Business Expenses section of the program.

[silviagmorales]

I have a followup question. If the sales tax is reported as a liability to the government, and when you pay if the amount that is paid is less due to discount for paying early, does the remaining liability gets reduced and a sales tax income/revenue gets recorded?  

[ZoltanB45]

Sales tax collected is not revenue. Both answers are not correct. Sales tax collected is a liability.. That is accounting and bookkeeping 101. Similar to when a POS system includes Tips, you do not add the Tips to income. It is not even debatable. If you want to do it right, enter the sales amount and not sales plus sales tax.

[ZoltanB45]

As far as the follow-up question, the liability is for your own bookkeeping purposes when it comes to a schedule C. I have never seen the early pay discount be recorded as income, but if you like, you could throw it to other income and not part of sales.

[Taxes made ez florida]

When answering go right to the source IRS.GOV

definition: Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses.

https://www.irs.gov/charities-non-profits/gross-receipts-defined#:~:text=Gross%20receipts%20are%20th...

Then put taxes collected on taxes and licenses.

[Taxes made ez florida]

irs.gov says different please read

https://www.irs.gov/charities-non-profits/gross-receipts-defined#:~:text=Gross%20receipts%20are%20th...

[TaxHelp_01]

Sales tax collected is a liability and should not be included in gross income. Neither should the payment to the state/local government be deducted as an expense. Please read IRS Publication 334. Chapter 5 -Business Income states clearly "Sales tax. State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income."

Additionally, Chapter 8 -  Business Expense subsection Taxes has the following Caution Message "Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Do not include these taxes in gross receipts or sales."

Publication 334 (2023), Tax Guide for Small Business | Internal Revenue Service (irs.gov)

I hope this provides clarity for anyone looking for answers on this topic.

[Mike9241]

i've seen the opposite, sales tax discount recorded as taxable income) on many returns including those prepared by multiple CPA firms. Some involve very substantial amounts with the businesses having over $100 Million in sales.

 There's the general rule that all income is taxable unless specially excluded under the tax laws. I see no such law or ruling. so the only remaining question is it income.

[Mike9241]

The big issue I see is that some businesses will receive 1099 forms which will include the sales tax especially those darn 1099-ks. thus a business owner faces the dilemma of getting a notice from the IRS because of a revenue mismatch if they exclude sales tax from revenue and some 1099s include it.

if this is your situation, I would just ignore what the IRS says and include sales tax in revenue and take a deduction for the payments which if your cash basis would have to include payment made after the year for the current year. consistency is required and should not be changed. (changing would probably require filing form 3115). what's really needed is for the IRS to revise its forms to have a line to subtract out the sales tax.  

possibly a workaround on some forms would be to include sales tax in revenue and take it out where there's a line for returns and adjustments. 

the funny thing is accrual basis taxpayers don't have this issue at least with the iRS. 

[AmeliesUncle]

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@TaxHelp_01 wrote:

Please read IRS Publication 334.

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You seem to have skipped Chapter 7 that gives a more rounded answer:

If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts.

If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income.

It depends on who the state "imposes" the tax on: the buyer or the seller.

I recently learned that my state (Minnesota) imposes it on the seller (even though they are required to collect it from customers).  That means in my state it should be included in gross receipts (then deducted as an expense).