Is sales tax an expense or a liability?

Definition of Sales Tax

In the U.S., a sales tax is a state tax (and possibly an additional local tax) that is paid by the buyer at the time of purchase. The amount of the sales tax is based on the product and the sales tax rate. For instance, in some states unprepared grocery items are not subject to a sales tax. Items purchased for resale are not subject to the sales tax when purchased by the retailer, but will be subject to the sales tax when the items are sold to the end customer. In some cities, there could be a state sales tax of 6% plus a county tax of 1% and a tourist district sales tax of 3%. In another state there could be only a sales tax rate of 8%.

The sales taxes collected by a merchant are not part of the merchant's sales and are not part of the merchant's expenses. Instead, the merchant is merely an agent of the state and will record the sales taxes collected as a current liability. When the merchant remits the sales taxes to the state, the current liability account is reduced.

If a company purchases a new delivery van, the sales taxes paid on the van are recorded as part of the cost of the van. The total cost of the van will then be charged to depreciation expense over the van's useful life.

Examples of Sales Tax

If a company sells $100,000 of merchandise that is subject to a state sales tax of 7%, the company will collect $107,000. The journal entry to record this information is:

  • Debit Cash for $107,000
  • Credit Sales (or Sales Revenues) for $100,000
  • Credit Sales Taxes Payable for $7,000

When the company remits the $7,000 to the state, the company will credit Cash and debit Sales Taxes Payable. Note that in this example that the sales tax is not an expense and it is not part of the company's sales revenues.

If a company purchases a new delivery van for $50,000 plus $3,500 of sales tax, the company will record the truck as an asset at its total cost of $53,500. In this situation, the sales tax of $3,500 is considered to be a necessary cost of the truck and will be part of the depreciation expense recorded during the useful life of the truck.

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