Accrued Sales Tax

Field	Value
Owner	Unassigned — needs an owner
Department	General Accounting
Effective date	Not set in source
Scope	Recording sales tax collected, reconciling the sales tax return and the period-end liability, PBI's internal filing deadlines, and use tax. Does not cover setting up sales tax permits or maintaining rates in the point of sale — both are the client's responsibility.
Source	`General Accounting/12 - Accrued Sales Tax/Accrued Sales Tax Concepts.docx`

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and services.

Sales tax is not part of the business's profits — this is why it's known as a pass-through tax. All tax collected is government property. Any tax collected and not remitted is subject to penalties.

The rate depends on the state, city, and county where the business has a physical presence. Each state has different rules and requirements, so check with the state to understand theirs. The responsibility for collecting and remitting usually falls on the seller.

It is the client's responsibility to set up the correct sales tax permits and to maintain the rates in the point of sale.

Calculating and recording sales tax

Sales Tax = Sales × Sales Tax Rate

Example: the state rate is 5% and the customer's bill is $400. You collect $20 in sales tax ($400 × 0.05) and charge the customer $420.

When sales tax is collected, the Sales Tax Payable liability increases, and cash or A/R increases as well:

	Debit	Credit
A/R or Cash	$420.00
Sales		$400.00
Sales Tax Payable		$20.00

When the money is remitted to the government, the payment process creates:

	Debit	Credit
Sales Tax Payable	$20.00
Cash		$20.00

The payable represents sales tax collected from customers but not yet remitted. The business owes this money to the government and must file timely to avoid penalties and interest.

Non-taxable sales

Each state defines taxable sales differently, and even a taxable product can have exceptions. A restaurant selling food — normally taxable — to a government entity with tax-exempt status creates a non-taxable sale.

A client's POS typically records this as a non-taxable sale, and a report can generally be generated separating taxable from non-taxable sales.

It is the client's responsibility to maintain documentation for any non-taxable sales.

Third-party delivery

Sales tax on third-party delivery varies by state and by client. State law determines who remits — the third-party provider or the operator providing the goods. Check with the state's department of revenue.

Don't assume who is remitting the tax, or that the tax is calculating correctly. Always check the transaction reports provided by the third-party service provider. If they remit, you should see tax being calculated and withheld from the client deposit. Save these transaction reports in the client folder — they are critical in an audit.

Also check the client's POS reports. Delivery orders should be set up as non-taxable, but this is not always the case. If client orders are calculating sales tax while the provider remits it, you must:

Make an entry moving the calculated tax out of accrued sales tax and reducing the delivery receivable.
Reduce these sales from the sales tax filing.

See Delivery in transit for the full treatment.

Sales tax return reconciliation

When the return is filed, reconcile the amount collected in the POS against the amount remitted on the return. This usually means entering the sales and deductions from the return and verifying that the tax calculated matches the tax collected.

Investigate any significant variance before the return is filed. The accounting manager determines and communicates what counts as significant.

Variance type	Treatment
Overcollection	Remit the amount to the state. All tax collected is government property.
Undercollection	The amount becomes an expense to the client at year end.

Any significant variance must be reviewed with the accounting manager, who decides whether the client should be notified. Discuss what constitutes a significant variance for each client with the accounting manager.

Internal filing deadline

Sales tax returns must be filed no later than the 15th of the month following the prior month end. If the 15th falls on a non-business day, file the business day prior.

Filing late returns results in large fines and penalties which Profit Builders will be liable to pay.

Sales tax returns are always prepared on a calendar basis, regardless of the client's fiscal calendar.

Set up a recurring Outlook calendar reminder to ensure this is completed. If you cannot complete these items before the deadline, communicate with your manager rather than filing late.

At the same time the return is filed, complete all three of these:

Schedule the payment

Schedule the payment for the due date.

Record the payment in the GL

Complete the recording of the payment in the general ledger.

Confirm to the client

Email the client a summarized confirmation of the filing, how much the payment was, and when it will be remitted. CC the manager on this communication.

Expected outcome: the return is filed, the payment is scheduled and recorded, and the client and manager both have written confirmation.

Period-end reconciliation

At the end of each period, reconcile the balance in the sales tax liability GL account against the client's point of sale report.

The balance should cover sales dates that have not yet been remitted to the government — typically the 1st of the month through the end of the period. It could include more dates if the prior month's sales tax has not been remitted before the current period ends.

Worked example: a restaurant's period ends March 18th. The return for February sales is scheduled to be remitted on its due date, March 20th. The ending liability for the March 18th period end is sales tax collected February 1st through March 18th.

The accounting manager determines the acceptable variance on the reconciliation.

PBI's standard procedure is to expense sales tax variances at the end of the year.

Use tax

Use tax is sales tax that was not charged by a vendor to our client. Vendors may not charge it because they are out of state, or because they aren't handling sales tax collection correctly.

Example: a restaurant orders a large quantity of light bulbs from an out-of-state vendor. The vendor did not charge tax on the invoice, but the light bulbs are a taxable purchase. The restaurant remits the calculated tax to the state on the sales tax return, or on a separate use tax return.

Some clients decide not to remit use tax. These decisions must be documented in writing and saved in the client folder.

Sales journal entry — how sales tax enters the books from the POS
Delivery in transit — the third-party delivery sales tax adjustment
Financial analysis — period-end balance sheet support

Supporting workbooks

See Supporting materials for:

Sales Tax Summary by State.xlsx — filing information per state: rate, whether prepayments are required, filing deadlines
Sample Sales Tax BS Recons.xlsx — examples of good balance sheet recons
Sample Sales Tax Return Recons.xlsx — examples of good recons to use when filing the return