Difference Between Sales Tax Collected & Sales Tax Payable

by Cynthia Hartman

Customers pay sales tax, known also as consumption tax, as an add-on to the purchase price of certain goods or services. State sales tax laws vary and usually include a list of exempted items. Some states may exempt basic food items from sales tax, for example, while assessing sales tax on restaurant meals. Retailers must collect and record the sales tax, paying it to the taxing authority each year.

Sales Tax

Most of the 50 states charge some form of sales tax. The end user of a non-exempt good or service pays the tax to the retailer. As long as the good moves between wholesalers and manufacturers, sales tax typically does not apply. When finished goods sell to the end consumer, the retailer assesses sales tax.

Sales Tax Collected

Retail sellers collect a certain percentage above the sale price of a good or service from the customer. The state and county taxing authorities dictate the appropriate sales tax percentage, and county and city sales tax rates may vary throughout the state. After collecting sales tax for a period of time, usually on an annual basis, the retailer must file a state sales tax return, reporting and remitting all of the collected sales tax within a specific time period.

Sales Tax Payable

When accounting for sales tax, businesses do not record the collected sales tax funds as revenue. For example, if a merchant sells an item for $20 and the sales tax is 5 percent, she records the transaction as a debit, or increase, to cash for $21. She also records a credit, or increase, to sales for $20 and a credit, or increase to sales tax payable for $1. Sales tax payable shows as a liability on the balance sheet. When the merchant remits the sales tax to the state, she debits, or decreases, the sales tax payable account.

Federal Sales Tax Collection

Federal taxes go by different names, although not usually sales tax. However, the 2010 Health Care Reform Act requires a new 10 percent federal sale tax charged on all indoor tanning services as of July 1, 2010. The retailer collects this federal sales tax directly from consumers.

About the Author

Cynthia Hartman started writing in 2007 and has written for several different websites. She brings more than 20 years of experience in finance and business ownership. Hartman holds a Bachelor of Science in finance and business economics from the University of Southern California.

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