Definition of Sales Taxes
Sales taxes are likely state and local taxes collected by the sellers of specified goods and the providers of specified services. The sales taxes are paid by the ultimate consumer (as opposed to a company that will resell the goods) and is typically a percentage of the selling prices. The seller must file a sales tax report and remit the sales taxes it had collected.
Basically, the company making the sale and collecting the sales taxes is an agent for the state and local government. Therefore, the sales taxes collected are not part of the seller's sales or revenues. This means the amount of sales taxes that were collected by the retailer will not be reported on its income statement. Instead, the sales taxes collected are reported on the balance sheet as a current liability until they are remitted to the government.
Explanation of Sales Taxes
Assume that all of a retailer's products are subject to a state sales tax of 6%. If the retailer sells goods having selling prices of $500, it will collect $530 [$500 + (6% of $500)]. This will be recorded as follows:
- Debit to Cash for $530
- Credit to Sales Revenues for $500
- Credit to Sales Taxes Payable for $30
Note that Sales Revenues did not include the $30 of sales taxes collected.
When the retailer remits the sales taxes to the government, the retailer will reduces its liability account Sales Taxes Payable with a debit entry for the amount remitted.