August 7, 2020

What Every CPA Should Know About Sales Tax

Notice that Angie was allowed to keep a small percentage of the sales taxes collected as her fee for collecting the taxes and sending them in. Collecting and filing sales tax won’t help your business grow. If you spend a lot of time reporting and filing state tax instead of growing your business, it may be time to automate your sales tax compliance.

  • Request the most recent vendor spend distribution and complete fixed-asset listing.
  • If your customer uses a credit card to buy the item, you’ll debit accounts receivable instead of cash since it’s income that you’re owed, but you haven’t been paid yet.
  • All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
  • This portion belongs to the government, and it should not include in our profit and loss statement.
  • If you’ve read this far and you’re feeling overwhelmed, just remember that getting started is the hardest part.

Management acts prudently by purchasing insurance to cover these risks to prevent catastrophic damage to operations. A policy and procedures review, properly designed and executed, similarly provides “insurance” against a sales or use tax disaster. The sales tax review should begin by breaking down the company’s revenue streams to learn how it determines the taxability of each component. Companies may use tax matrices or automated software product mapping, both of which should be examined in a policy and procedures review.

Sales Tax Double Entry on Purchases

The strengths and weaknesses of the company’s compliance system should be cataloged and any exposures quantified, if possible. The reviewer’s conclusions should be discussed with management. Industry best practices may also involve exploring automated or outsourced options. Do not overlook real property improvements, expansions, or other construction projects.

If the output tax exceeds the input tax, the company will pay the difference to tax authorities. Conversely, if input tax exceeds the output tax, then it may recover the difference from tax authorities. The settlement of sales tax is processed by the submission of periodic tax returns by the company. When you sell goods to customers, you likely collect and remit sales tax to the government.

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On the other hand if the gross amount of the sale is known, the formula for calculating sales tax below can be used. Use the following chart to get links to your state’s sales tax page and find out when the return and payment frequency is. Failing to file your report and remit your payment on time could result in penalties that range from 1% – 30% of the owed tax. Generally, you can apply for a sales tax permit online or through the mail.

Reporting Sales Taxes Collected

You can usually find this information on your state’s tax commission website. You should not only research their website, but also call and talk to a representative on how to set up and transmit collected sales taxes. Collected sales tax is not part of your small business revenue. When you collect sales tax from customers, you have a sales tax liability. If you sell raw materials to another business that then sells them to customers, you generally won’t collect sales tax from the business.

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It will need to remit the government shortly after collecting the tax. When this is done, the business will reduce its cash and its sales tax liability. Once the sales taxes are remitted, you’ll debit the Sales Tax Payable account and credit Cash.

It charges the sales tax to expense in the current period, along with the cost of the items purchased. The seller currently collects sales tax for certain products and services. Therefore, after Angie recently sold a $200 surfboard, she collected a sales tax of $12 tax preparer mistakes (0.06 x $200). As you expand your online business you may start selling on other shopping carts and marketplaces. Take the time to double check that you are collecting sales tax in all of your nexus states on all of your current shopping carts and marketplaces.

Sampling invoices to match sales when no tax is charged to exemption certificates will test the company’s procedures. In spite of this, sales tax compliance is often far from top-of-mind. In fact, 96% of accounting professionals are confident that their company has the correct sales tax strategies in place. Yet one in three rely on existing knowledge to determine sales tax rates and rules, and one in three use zip codes to find sales tax rates. Both strategies are likely to lead to costly errors and negative audit results.

Sale tax is the responsibility of suppliers to charge from the customer on behalf of the government. If the goods are sold many times before reaching the end consumer, the sale tax must be calculated and collected in all stages. All suppliers in each stage play a role as the government agency to collect sales tax on behalf of the government.

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