Sales tax

Sales tax is charged as a percentage of the selling price and added to the amount the customer pays. In the United States it is imposed by states and localities rather than the federal government, so rates and taxable categories vary widely by jurisdiction. Other countries use a broadly similar mechanism under names such as value added tax (VAT) or goods and services tax (GST), which apply at each stage of production rather than only at final sale.

For a business, sales tax is a liability rather than income. The tax charged on sales — output tax — is money held on behalf of the government, and in a VAT-style system the tax paid on purchases — input tax — is recoverable by a registered business. The business remits the difference. In double-entry terms, a registered business records revenue net of sales tax and posts the tax collected to a sales tax control account, so a $100 sale with 10% tax is recorded as $110 receivable, $100 revenue, and $10 sales tax payable.

Getting this treatment right matters because sales tax never belongs in the income statement of a registered business. Overstating revenue by including the tax inflates margins and misstates the receivables and payables balances. Unregistered businesses, by contrast, cannot reclaim input tax and simply treat it as part of the cost of what they bought.

Sales tax accounting is examined directly on ACCA Financial Accounting, where candidates must calculate the tax-exclusive amount from a tax-inclusive figure and post the control account entries. On securities exams such as the Series 7 and Series 65, sales tax is contrasted with the taxes that matter to investors — income, capital gains, dividend, and estate taxes — to reinforce the distinction between regressive consumption taxes and progressive income taxes.