Gross Sales and Sales tax

Should sales tax be included in gross sales?

If not, would it cause matching problem since the Form 1099-K includes sales tax in it.

Lets say taxpayer's business made total sales of $200,000 in 2018 and the sales tax collected is $8,500.

Lets assume all transactions were through credit card payments. Therefore, Form 1099K will show $208,500.

If taxpayer only reports $200,000 in his Schedule C, he will probably have to deal with IRS computer matching issues down the road.

Or should he add sales tax onto the gross sale and reports $208,500 on his Schedule C Line 1 as Gross Receipts/Sales, and then back it out as an expense item?

You do what you think is best but good, well run companies do not report sales tax in sales and deduct the sales tax as an expense.

sales tax is not an expense and sales should not include tax.

I NEVER have done what you suggest and have never received a notice.

Or should he add sales tax onto the gross sale and reports $208,500 on his Schedule C Line 1 as Gross Receipts/Sales, and then back it out as an expense item?

This topic has been discussed many times before. I agree with you and I do it your way. And that’s because people do get matching notices on it. Issue isn’t limited to Sales Tax. Consider tips paid to waiters and waitresses.

See this link:

viewtopic.php?f=8&t=2772

well run companies do not report sales tax in sales and deduct the sales tax as an expense. Except sometimes.

In addition, the sales tax collected by the retailer from a purchaser must be included in the retailer's gross in­come for Federal income tax purposes. Since such tax is imposed upon the retailer, the tax is deductible by the retailer (when paid or accrued by the retailer) as a tax under section 164(a)(4) of the Code.

. RR 77-465

When the sales tax is paid by a consumer with respect to items used in connection with the consumer's trade or business, the tax is not de­ductible by the consumer as a tax under section 164 of the Code but is deductible as a business expense under section 162, provided the item pur­chased meets the requirements of that section.

. RR 77-465

Sales tax; California. The sales tax imposed by California on the retailer and paid to the retailer by the consumer is includible in the retailer's gross income. The tax is deductible by the consumer when paid to the retailer and by the re­tailer when accrued or paid to the State.

. RR 80-1

well run companies do not report sales tax in sales and deduct the sales tax as an expense. Except sometimes.

In addition, the sales tax collected by the retailer from a purchaser must be included in the retailer's gross in­come for Federal income tax purposes. Since such tax is imposed upon the retailer, the tax is deductible by the retailer (when paid or accrued by the retailer) as a tax under section 164(a)(4) of the Code.

. RR 77-465

When the sales tax is paid by a consumer with respect to items used in connection with the consumer's trade or business, the tax is not de­ductible by the consumer as a tax under section 164 of the Code but is deductible as a business expense under section 162, provided the item pur­chased meets the requirements of that section.

. RR 77-465

Sales tax; California. The sales tax imposed by California on the retailer and paid to the retailer by the consumer is includible in the retailer's gross income. The tax is deductible by the consumer when paid to the retailer and by the re­tailer when accrued or paid to the State.

. RR 80-1

I stand corrected... obviously, I don’t do a lot of retail but the ones I do, we use GAAP to record the sales tax liability.

Respect accepted and returned. We did not say different things. Mine applies to states where the sales tax is imposed on the seller. Few if any, but it's the rule. So I said Except sometimes.

And what I think of the excerpted instructions is that they are OK.

Respect accepted and returned. We did not say different things. Mine applies to states where the sales tax is imposed on the seller. Few if any, but it's the rule. So I said Except sometimes.

And what I think of the excerpted instructions is that they are OK.

Crap, you are too quick Len. I deleted my post as I realized after I hit post that we were indeed stating the same thing. I never saw your line "except sometimes". ARGH....not sure we can get the post back but for those that may look at this later here is the jest.


Sales tax collected on behalf of the state and remitted to the state is not the type of sales tax the RR Len posted is referring to and also not the type of sales tax *I BELIEVE* the OP is asking about.

South, you are right, sales tax in the typical retail sense should not be included in income nor deducted as expense. Which is why the 1099-K debacle is an issue. It forces high credit card businesses to do their books DIFFERENT than someone who does not take as many cards. Makes no sense.

I disagree that the 1099-K FORCES businesses to do their books differently. That argument to me is like teachers teaching to the test, which in Texas is a big deal and happens way too much. There are too many things that make the 1099-K unreliable and practically un-reconcilable to a set of books. So it is their fear that is "forcing" them, not the 1099-K form.

I disagree that the 1099-K FORCES businesses to do their books differently. That argument to me is like teachers teaching to the test, which in Texas is a big deal and happens way too much. There are too many things that make the 1099-K unreliable and practically un-reconcilable to a set of books. So it is their fear that is "forcing" them, not the 1099-K form.

I totally agree Joan, but there are realities. And I should have said “do their returns differently”. The books are the same....mostly.

I have an audit going on now where the IRs refuses to accept my reconciliations from the 1099-k to what was reported on the original return. The only thing they will accept is an amended return with the full 1099-k numbers reported as income and the adjustments listed as expenses. Period. Been battling it for over a year. I am not sure there is anyone at the IRS that understands accounting principles anymore. Sales tax is NOT an expense!! Grrrrr!

I disagree that the 1099-K FORCES businesses to do their books differently. That argument to me is like teachers teaching to the test, which in Texas is a big deal and happens way too much. There are too many things that make the 1099-K unreliable and practically un-reconcilable to a set of books. So it is their fear that is "forcing" them, not the 1099-K form.

I totally agree Joan, but there are realities. And I should have said “do their returns differently”. The books are the same....mostly.

I have an audit going on now where the IRs refuses to accept my reconciliations from the 1099-k to what was reported on the original return. The only thing they will accept is an amended return with the full 1099-k numbers reported as income and the adjustments listed as expenses. Period. Been battling it for over a year. I am not sure there is anyone at the IRS that understands accounting principles anymore. Sales tax is NOT an expense!! Grrrrr!

I can not tell you how much I feel your pain. My last 2 audits were similar. I literally told an agent, "your opinion is not relevant here. I'd like to stay with the law if that's OK" as he asked to meet my client to discuss stuff and I said, I am here under POA. He got belligerent and threw me out of his office. I had to work with his superior. It was childish... ask the auditor to point to the code where the 1099K MUST be reported in gross sales. Maybe you'll get lucky and he/she will throw you out! Good Luck!!!

In addition, the sales tax collected by the retailer from a purchaser must be included in the retailer's gross in­come for Federal income tax purposes. Since such tax is imposed upon the retailer, the tax is deductible by the retailer (when paid or accrued by the retailer) as a tax under section 164(a)(4) of the Code.

. RR 77-465

When the sales tax is paid by a consumer with respect to items used in connection with the consumer's trade or business, the tax is not de­ductible by the consumer as a tax under section 164 of the Code but is deductible as a business expense under section 162, provided the item pur­chased meets the requirements of that section.

. RR 77-465

Sales tax; California. The sales tax imposed by California on the retailer and paid to the retailer by the consumer is includible in the retailer's gross income. The tax is deductible by the consumer when paid to the retailer and by the re­tailer when accrued or paid to the State.

. RR 80-1

I am still very confused with the different situations like "sales tax collected by the retailer from a purchaser" or "sales tax imposed on retailers paid to retailers", etc.

I am in California. Here every county has its own sales tax rate and the sales tax is charged on the consumers. When a consumer buys a merchadise that is sales taxable, he pays the sales tax to the retailer. And then the retailer will have to remit the sales tax to the state subsequently.

If my interpretation is correct, according to RR 80-1, retailers in California should include the sales tax paid by the consumers in his gross sales. Am I correct?

There are too many things that make the 1099-K unreliable and practically un-reconcilable to a set of books.

We’re really not trying to reconcile to it. We’re just recognizing that if we “do our books right” we might have a matching issue, so we increase the top line to avoid a notice. That’s all. There’s really not much to this issue. If you don’t want to do that and are willing to file a return when the Line 1 Gross Receipts per the tax return are less than the sum total of the 1099K’s in your hand, then so be it. If you get a Notice, then have fun responding to it. And in that case, you might actually have to reconcile to it. Doesn’t sound like a lot of fun to me. I myself make no adjustment if the tax return gross receipts exceed the 1099K total.

for those that may look at this later here is the jest.
. And we are all laughing.

The only thing they will accept is an amended return with the full 1099-k numbers reported as income and the adjustments listed as expenses. Period. Been battling it for over a year. I am not sure there is anyone at the IRS that understands accounting principles anymore. Sales tax is NOT an expense!! Grrrrr!

It was childish... ask the auditor to point to the code where the 1099K MUST be reported in gross sales. Maybe you'll get lucky and he/she will throw you out! Good Luck!!!

I don't get it -- in this forum, and elsewhere, tax professionals on countless occasions have commented, "just report it [anything you don't agree is income] on Schedule C/Line 21 and back it out".

So why dig in your heels on this item, when so willing to "go with the flow" almost all the rest of the time? I suppose if there is a gross receipts tax of some kind, then it would be important to back the sales tax out of that number, but otherwise, why would anyone care?

One interesting aspect of this issue is what does the accounting software that you use show? Top line or liability? And if it is liability, then you have one huge reconciliation issue to get it to the top line.