USA Sales Tax Credit

[ADDISION]

I have the following situation for a return that was filed 09/15/18

Sales tax Liability for August 2018 $2478.00 G/L account 2220
Early filing discount $6.20
Remaining Liability $2471.80


Now, I was issued a credit on Sep. 10th for $6000 for an over-payment that was made in January 2018.

The State automatically applied part of the credit to the return filed 09/15. So the remaining credit is $3528.20.

How do i record this as a journal entry to my books so that I show the credit posted against the return, and so I show the remaining credit?

 

[bklynboy]

Record as follows:

Debit: Sales Tax Expense 2,471.80
Credit: Liability 2,471.80

Record Credit:
Debit Liability 2,471.80 (you no longer owe this)
Debit Receivable 3,528.20 (You are owed this or can apply against future sales tax)
Credit Sales Tax Expense 6,000 (Adjust prior amount expensed which was overstated)

 

[Samir]

There are 2 schools of thought on sales tax that I've seen in the 'wild'. One is that a sales tax is an expense and any sales tax initially collected is considered income. The problem with this is that it inflates the income as well as the expenses on an income statement.

The second is to treat sales tax as a short term liability since the business is just collecting it for the state. This is my preferred method as it doesn't comingle taxes with the actual income and expense for the company. This also makes it easy see that the early filing discount is actually income, and creates a 'clearning account' that can be easily reconciled for the correct amount of tax. This method also helps to see the true liability of taxes still collected but not remitted as it appears on the balance sheet.

The entries would be the following.

When a $100 sale is made and the sales tax is 10%:
Debit: Cash $100.00
Credit: Sales $90.00
Credit: Sales Tax Payable $10.00

When it comes time to pay the sales taxes and the discount is 5%, the entry looks like this:
Debit: Sales Tax Payable $10.00
Credit: Sales Tax Discount Earned: $0.50
Credit: Cash $9.50

Now in the above scenario, if the tax was treated as a liability, it would have been immediately obvious something wasn't right since the balance of the liability account at the end of the month should be around the same amount to be paid, rounding and sales tax discount not accounted for.