What are Sales Taxes?

A sales tax is a tax imposed on retail goods and services at the point of sale. The tax is collected by the entity selling the product or service to a third party, and is remitted to the applicable government entity at regular intervals. A business is required to collect sales tax when it has nexus within the taxing region. This has historically meant that the firm has a physical presence in the region, perhaps because of a facility, or because an employee lives there.

Accounting for Sales Tax Paid on Inventory

Sales tax is generally only paid by the end customer. This means that a business does not pay sales tax on any purchases it makes that are to be resold to a third party. To avoid having to pay sales tax, the business obtains a reseller’s certificate from the state government, which it supplies to any vendor selling goods to it that are intended for resale. Once the vendor receives the reseller certificate, it has valid grounds to not bill sales tax to the purchasing entity.

In cases where the firm does not have a reseller’s certificate, then it will be charged sales tax on its purchases from vendors. These sales taxes should be included in the cost of inventory, and will then be charged to expense whenever the goods are sold to the end customer. Inventory costs appear on the balance sheet, while the cost of goods sold appears on the income statement.