Should sales taxes be included in gross sales on the income statement of a cash-basis business?

Question

Assume a company collects sales taxes at the point of sale (eg a fast food franchise) and operates on a cash basis. How should the cumulative amount collected for sales tax be reported on the income statement?

1) Include it in gross income and deduct it as an *accrued* expense even though the business is on a cash basis. Sales and payroll taxes are recognized exceptions under cash basis accounting.
2) Do not include collected sales taxes in reported gross income so that they never become a part of net income.
3) Include sales taxes in gross income and only deduct them as an expense when collected taxes are actually remitted to the state (ie enforce a strict cash basis)
4) Show sales taxes payable as an offset to gross sales as if it were a direct expense like COGS

I'm getting different answers from every accountant I ask about this!

Answer 1

See IRS publication 535.



Sales taxes imposed on the seller by state law are part of the gross sales and then deducted as an expense.



Sales taxes imposed on the buyer by state law are NOT included.



So how does your state impose sales tax?

Answer 2

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RE:

Should sales taxes be included in gross sales on the income statement of a cash-basis business?

Assume a company collects sales taxes at the point of sale (eg a fast food franchise) and operates on a cash basis. How should the cumulative amount collected for sales tax be reported on the income statement?



1) Include it in gross income and deduct it as an *accrued* expense even though the...

Answer 3

not sure what GAP says but if you have register receipts that show the sales and sales tax separately, it is no problem to record the sales as income and the sales tax to a liability account since you are obligated to pay it to the state, it is not your money

I have clients who include sales tax in the price of their product without any kind of distinction as to the amount of sales tax and the amount of the actual sale, this means I have to determine their sales price by the state sales tax rate

you definitely do now want to pay income tax on the sales tax that is not your money, and not part of your profit(or loss)

when you purchase products you will turn around and sell, the sales tax adds to the cost, something you cannot avoid unless you manage to have an exemption permit, and yes it is a cost of goods, as is freight

cash basis is cash basis, accrual is accrual the only mixture is your inventory figure