AccountingBLOCK - Accounting Forums

I have always wondered what exactly is sales tax... you collect it but it is not really an income, where does it go?

Let me start explaining that with an example. A company sells $200,000 worth of products that is subject to state sales tax of 7%, the company will collect $214,000. It will record sales of merchandise of $200,000 and will record a liability for sales tax of $14,000.

Tax collected is different from the income and is recorded as such. Once the company pays the sales tax to the state, they have no more liability left.

Things are different when you buy something for your business, for example a car. You pay $22,000 for your car where $2000 is the sales tax you paid. Your expense is 22,000 because to acquire an asset you paid $22,000 and you can consider your expense and also use the same amount for depreciation purposes.

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Zahid H. Lilani