Sales tax collected from customers belongs to the state from the moment you collect it. The bookkeeping goal is simple: keep it out of revenue, show exactly how much you owe and prove it matches every return you file. Rules vary by state; see our state guides and our explanation of sales tax nexus.
Record collected tax as a liability
When you make a taxable sale, the customer pays the price plus tax. Record the price as revenue and the tax in a sales tax payable account. If your sales system reports only gross receipts, separate tax before posting. Revenue inflated by sales tax overstates income and makes the payable account useless.
Separate accounts by jurisdiction
If you file in more than one state, or in a state where local taxes are filed separately, use sub-accounts for each jurisdiction. Reconciling a single combined payable account across several returns is far harder.
Reconcile to each return
After each return is filed:
- Compare taxable sales on the return with taxable sales in the books for the period
- Compare tax due on the return with the payable balance for the period
- Record the payment against the payable account
- Investigate differences: rounding, discounts for timely filing, late corrections or sales recorded in the wrong period
The payable balance after payment should equal only tax collected for the current, unfiled period.
Vendor discounts and rounding
Some states allow a vendor's discount for timely filing. Record it as other income or a reduction of expense, not by adjusting the payable account without explanation.
Marketplace-collected tax
When a marketplace facilitator collects and remits tax on your sales, that tax is not your liability. Record those sales separately and do not add the marketplace's tax to your payable. Many states still require you to report marketplace sales on your return as exempt or deductible.
Exempt sales
Keep exemption and resale certificates for exempt customers on file. In an audit, missing certificates turn exempt sales into taxable ones.
Use tax
When you buy taxable items for your own use without paying sales tax, for example from out-of-state sellers, you may owe use tax. Accrue it monthly to a use tax payable account so it is not forgotten.
Records for audit
Keep sales reports, returns, exemption certificates and reconciliations for the period your state requires. The IRS's recordkeeping guidance covers federal records; state rules for sales tax records are set by each state.
Our bookkeeping services include monthly sales tax reconciliations.
Monthly sales tax checklist
Compare the sales tax liability account to the return, confirm marketplace-collected tax is excluded and file before the due date.
Exempt sales
Keep exemption and resale certificates on file for exempt sales, and record exempt sales in a separate revenue account so the return can report them.
Key terms
Definitions for terms used in this guide, from our small business glossary:
- Exempt and Non-Exempt Employees: Non-exempt employees must receive overtime under federal law; exempt employees meet specific tests that remove that requirement.
- Use Tax: Use tax is a tax on taxable goods or services used in a state when sales tax was not collected at purchase.
