In the simplest possible terms, business accounting involves tracking revenue, expenses, income, assets and liabilities. The more that revenue outpaces expenses, the more income a business generates and the more profitable it becomes. And the more that assets outweigh liabilities, the more valuable the organization. Easy, right? Not really. That’s because accounting requires meticulous recording, classification and reporting of data to ensure accurate financial records for key stakeholders and, in many cases, various federal and international regulatory bodies.

Adding to the complexity of accounting is the fact that some funds, such as sales tax, are difficult to categorize. Is sales tax considered revenue for the company or a cost? The truth is that, while businesses might collect sales tax at the time of purchase, the money doesn’t actually belong to them. Rather, it belongs to whatever state or local authority requires it. As such, the business is merely a temporary custodian of the funds, which need to be recorded by the company — as sales tax payable — but ultimately passed through to the tax authority, an action known as remittance. Technically, that makes sales tax payable a liability — and a unique one. As a result, recording sales tax payable can get tricky for companies, not only because of varying tax rates across the U.S. and international authorities, but also because of the detailed administrative rules surrounding how and when companies collect sales tax and remit it to authorities. This article explains sales tax payable and how to accurately record it in financial statements.

What Is Sales Tax Payable?

Think of sales tax payable as a bridge between the moment customers hand over their cash and when the extra portion for tax makes its way to state and local governments. It’s an account listed in a company’s general ledger that represents the amount of sales tax collected from customers but not yet remitted to tax authorities. This temporary holding spot for these funds allows businesses to separate the tax collected from their sales revenue — a crucial distinction for accurate financial reporting and compliance with tax laws. It also ensures that the funds collected for tax purposes are ultimately available for remittance and not accidentally spent.

Proper management of sales tax payable helps businesses avoid penalties, interest and potential audits by helping companies accurately track and remit these taxes on time. However, the journey doesn’t come without hurdles. Varying tax rates by jurisdiction, complex regulations across regions and strict deadlines can make the task of managing sales tax payable challenging. Mistakes can lead to fines, legal trouble and a tarnished reputation.

Key Takeaways

  • Sales tax payable is a liability on a company’s balance sheet that represents the sales tax collected on behalf of tax authorities when customers purchase a product or service.
  • While the business collects the tax, the money ultimately belongs to the tax authority, which collects it from the business, usually on a monthly or quarterly basis.
  • Companies that do business in multiple jurisdictions must apply different local, state and international sales tax rates based on the location of the transaction, making the process complex.
  • Companies must maintain accurate records of transactions, using a series of debits and credits on a general ledger to note the amount of every transaction that represents revenue for the company, the amount owed to authorities for sales taxes and when those taxes are paid.
  • Financial management software that automatically updates, applies and records appropriate sales tax rates for each transaction has made it easier for companies to maintain accurate financial records and avoid tax penalties.

Sales Tax Payable Explained

Sales tax is a significant revenue driver for U.S. state and local governments. In fiscal year 2022, for example, nearly one-third of states’ total tax dollars (29.5%) came from taxes on general sales of goods and services, according to Pew Research. While income tax remains the primary revenue driver for most states that impose them, sales tax is the primary revenue stream for 15 of 45 states that levy them. All of this is to say that the proper collection and remittance of sales tax are absolutely crucial to the operation of state and local government.

For their part, companies must collect sales tax by adding the applicable tax rate to the price of goods or services at the point of sale, based on the rules of the jurisdiction where the transaction occurs. Companies then record these amounts in a liability account on the balance sheet until it’s time to remit the monies to the appropriate state and local governments, usually monthly or quarterly. The rules governing the process vary widely, with different rates, taxable items and filing requirements across thousands of jurisdictions. The process is relatively easy if a company only sells products in a limited number of jurisdictions, but with the growth of online sales, companies often sell across the country, or even around the world.

This complexity makes managing sales tax payable challenging, requiring meticulous record-keeping and an up-to-date understanding of applicable sales tax laws to ensure accurate collection, reporting and remittance. Companies must stay informed about current regulations and often invest in specialized accounting software or services to manage the process accurately and efficiently.

How to Record Sales Tax Payable

The process of recording sales tax payable is fairly straightforward, and financial management software that automatically updates tax rates across jurisdictions has certainly made it less complex. However, it still requires meticulous attention to detail. The following seven steps can help companies maintain accurate records.

  1. Understand Sales Tax Regulations

    Sales tax regulations can best be described as a maze of varying rates, exemptions and deadlines across jurisdictions. Further complicating the situation is the fact that it’s not uncommon for jurisdictions to adjust tax rates, modify product or service exemptions or update filing deadlines multiple times a year. Staying on top of sales tax regulations can be dizzying, making it easy to slip up without even realizing it. There are two main ways for companies to stay ahead of changing sales tax rules and regulations.

    • Know the rates: Given the sheer volume of changes and the nuances in various tax laws, manually tracking changing tax rates across different jurisdictions is daunting. Fortunately, automated tax compliance software can update rates in real time to maintain accuracy. Not only is it a huge time-saver, but it also significantly reduces the risk of errors.
    • Determine nexus: Nexus refers to the level of business presence or connection that a company must have within a state in order for that state to require the company to collect and remit sales tax on sales made to customers. This connection could be physical, such as having a brick-and-mortar store, office or warehouse, or it could be economic, such as reaching a certain threshold of sales or transactions in a particular state. With many companies able to sell products almost anywhere online, determining all the places where a company has nexus and applying the correct tax rates has become even more critical. Tax compliance software can help companies automatically determine nexus.
  2. Collect Sales Tax

    Once companies understand sales tax regulations, it’s time to apply them by collecting the appropriate tax. Most state and local tax authorities apply sales tax as a flat percentage of a sale — for example, 7% that’s added to the price of a product or service by the seller at the time of sale. The trick for the seller is to apply the correct rate based on a determination of nexus and the product or service category. Again, up-to-date software, such as accounting systems, ecommerce platforms, enterprise resource planning (ERP) systems and tax compliance solutions, can automatically calculate the tax due based on the appropriate jurisdiction to maintain accuracy and compliance.

  3. Record Sales and Sales Tax Collected

    After sales tax is collected, it’s pivotal to record sales and the associated sales tax properly to maintain clear financial records and compliance with tax laws. When a sale is made, the business splits the amount received into two components on its balance sheet.

    • Sales revenue: This is the amount earned from the sale of a product or service and is recorded as revenue on an income statement.
    • Sales tax payable: This is the sales tax collected from the customer, which is categorized as a liability and must then be remitted to tax authorities at a later date, typically monthly or quarterly.

    This separation helps businesses accurately report their earnings and fulfill their tax obligations, preventing common challenges, such as overreporting income or misallocating tax liabilities.

  4. Adjust for Sales Returns and Allowances

    Another complication in the sales tax payable recording process is that sold items are sometimes returned later or discounts are granted after a sale, such as volume-based discounts. This directly affects total sales revenue and the amount of sales tax owed to authorities, requiring companies to revise financial records. In the event of returned goods or discounts, companies need to reduce both the sales revenue and the sales tax payable accounts to accurately mirror the actual taxable sales. When a company processes a return or grants an allowance, it records the transaction by debiting its sales returns and allowances account, which is a contra-revenue account. This reduces the total revenue reported because it offsets the sales revenue account. In addition, the sales tax payable account must be credited to reflect the decrease in tax liability. If the transaction involves physical goods being returned, the inventory records are also updated to account for the increase in stock.

  5. Remit Sales Tax to the Government

    After collecting sales tax and making any necessary adjustments, companies are responsible for remitting the funds to the government, a process that hinges on understanding the specific timelines and methods dictated by local tax authorities. There are two key components to the process.

    • Periodic remittance: This refers to the scheduled submission of collected sales tax to government authorities at regular intervals. Generally, businesses must file sales tax returns and make payments monthly, quarterly or annually, depending on the rules of the jurisdiction and the volume of sales.
    • Record payment: When making payments, typically done electronically, companies must record them in their general ledger as a reduction in the sales tax payable account and cash.

    Staying on top of due dates is important because late payments can result in penalties and interest charges.

  6. Regularly Review and Reconcile

    The process of recording sales tax payable doesn’t end with remittance to tax authorities. To ensure accuracy, companies should conduct regular reviews to compare the sales tax amounts collected, as recorded in their accounting system, against actual sales transactions, as recorded in a point-of-sale system. By adhering to this practice, they can remain compliant with tax regulations, avoiding potential penalties and interest charges for underpayments or late filings. There are two main steps in the process.

    • Review sales tax payable: As an ongoing best practice, companies should review and reconcile their sales tax payable account at least monthly to align with typical reporting periods.
    • Reconcile: Reconciliation can identify errors in sales tax collection or recording, allowing companies to adjust financial records before remitting sales tax to the government. By identifying any discrepancies early, companies can address them before they become larger issues.
  7. Use Accounting Software

    As mentioned earlier, the complexities of selling in multiple taxing regions make it crucial for companies to use software to record sales tax payable, streamline the process and reduce the likelihood of errors. Accounting software can automate the calculation of sales tax rates to maintain accuracy across different jurisdictions and simplify the remittance and reporting processes. It can automatically update sales tax rates, apply them to sales transactions and generate reports needed for tax filings. Tax compliance software specifically designed for managing sales tax payable can provide additional benefits, such as real-time updates to tax laws. When selecting software, companies should look for the ability to integrate the system with existing point-of-sales platforms. In addition, they should prioritize systems with automatic sales tax rate updates and comprehensive reporting capabilities.

Journal Entries for Sales Taxes Payable

Journal entries are a foundational building block of a company’s general ledger, documenting the specifics of every transaction, such as the date, type of transaction, credited and debited amounts and any notes. Journal entries consist of a series of debits and credits, with the goal of having the amount of total credits always equal the amount of total debits, hence the term “balancing the books.”

When it comes to sales tax payable specifically, companies record two separate journal entries — one when the transaction takes place and another when the sales tax portion is remitted to a tax authority. Each journal entry consists of a credit and debit to various asset and liability accounts (more on that below). The process of entering multiple journal entries in this way allows companies to clearly show how much they truly earn and how much sales tax they need to hand over to authorities. Using a series of debits and credits helps companies balance their books accurately.

Sales Tax Payable on the Balance Sheet

The specific process of creating and managing journal entries for sales tax payable on a balance sheet involves a series of interconnected transactions. It begins with the sale of a taxable item or service, which requires a journal entry for the total transaction amount, including the sales tax. This total amount is recorded in the entry as a debit (or increase) to the company’s accounts receivable (if the sale is on credit) or cash account (if the sale is in cash). The portion of the sale attributed to sales tax is recorded in the same entry as a credit (increase) to a sales tax payable account. Meanwhile, the revenue from the sale — the total transaction amount minus the sales tax — is recorded in the entry as a credit (increase) to the company’s sales or revenue account. By recording the transaction in this way, the total amount of the debit is balanced by the total amount of the credit.

A second journal entry occurs when the company remits the sales tax payable to the tax authority. To do so, the company creates a journal entry debiting (or decreasing) its sales tax payable account by the amount of the tax paid. At the same time, the entry credits (or decreases) its cash account by the same amount, reflecting the outflow of cash to the tax authority. Again, the debit and credit amounts are equal, adding up to zero and keeping the books balanced.

Example of Sales Taxes Payable

The best way to see how sales tax payable is recorded is to look at an example of a journal entry. Consider a bookstore that sells a novel for $20 cash, with a 10% sales tax ($2). The total charge to the customer is $22. Here’s how the bookshop records this transaction in its books.

Its first journal entry would be made after the transaction and would look like this:

Date Account Note Debit Credit
01/01/2024 Cash Sales tax collected $22  
  Revenue     $20
  Sales tax payable     $2

When the company remits the sales tax to the tax authority, the journal entry would look like this:

Date Account Note Debit Credit
01/31/2024 Sales tax payable Remitted sales tax $2  
  Cash     $2

Once again, the total debits for each transaction are equal to the total credits, maintaining balance.

Make Reporting Sales Tax Payable Easy With NetSuite

As selling products across borders became easier with advances in ecommerce, managing sales tax payable became more difficult. But powerful and comprehensive financial solutions, such as NetSuite’s SuiteTax tax management solution, can dramatically simplify this challenge by leveraging automation to streamline sales tax management processes. With features such as automated sales tax calculation, real-time sales tax rate updates and seamless integration with sales and accounting data, SuiteTax allows businesses to handle sales tax accurately without the headaches of manual processes. SuiteTax handles sales tax requirements across jurisdictions with ease, automatically applying the correct sales tax rates at the point of sale, reducing the risk of errors and ensuring compliance with local tax laws.

SuiteTax is part of NetSuite’s broader ERP offerings for finance, human resources, customer relationship management and manufacturing. The native integration of each component allows for a holistic view of finances so sales tax liabilities are accurately reflected in financial statements and reports. For example, when a sale is recorded, the system automatically calculates the sales tax payable and updates financial records accordingly, making end-of-period reporting and tax remittance much smoother.

Accurately recording and managing sales tax payable are important but complex processes for businesses. By understanding the applicable sales tax regulations, diligently collecting the correct amounts, properly recording transactions, remitting sales tax payments on time and regularly reconciling accounts, companies can ensure compliance and avoid costly penalties or audits. Accounting and tax compliance software can help by automating calculations, tracking changes and streamlining the overall sales tax payable workflow, allowing businesses to effectively navigate sales tax payable intricacies and maintain accurate financial records.

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Sales Tax Payable FAQs

What is tax payable?

Tax payable refers to the amount of tax a company or individual owes to a tax authority, such as the IRS or state tax department, but has not yet paid. It includes various types of taxes, including income tax, sales tax and property tax, depending on the taxpayer’s obligations. For companies, this liability is recorded on a balance sheet and represents a future outflow of cash to settle tax obligations.

How do you record sales tax payable?

To record sales tax payable, debit cash or accounts receivable accounts for the total amount of the sale, including the tax, and credit a sales revenue account for the sale amount, excluding the tax. Then, credit the sales tax payable account for the amount of sales tax collected, reflecting this as a current liability on the balance sheet. This process ensures that the sales revenue is accurately recorded without the sales tax, and the obligation to remit the collected sales tax to the tax authority is acknowledged.

Does sales tax payable have a debit or credit balance?

Sales tax payable typically has a credit balance because it represents an amount collected from customers on behalf of tax authorities, making it a liability. As sales occur and sales tax is collected, the account is credited, increasing the liability. When the sales tax is remitted to the authorities, the account is debited, decreasing the liability.

What is the journal entry for sales tax payable?

When recording sales tax payable in a journal entry, debit the cash or accounts receivable account for the total amount received from the customer, including the sales tax. Then, credit the sales revenue account for the amount of the sale excluding tax, and credit the sales tax payable account for the amount of sales tax collected. The sales tax payable account reflects the tax that will eventually be remitted to tax authorities. This process separates the revenue earned from the tax liability to maintain clear financial records.