Indirect Tax & Income Statement Classification
Posted: 22 Jun 2022, 21:22
Hi
I am pondering a couple things, and would love anyone else's take. We are working on becoming tax compliant for sales and use and various VAT and other indirect taxes where we have a tax liability to collect and remit but are not yet doing so.
For the current period, where we should be collecting and remitting the sales tax, while not generally technically correct from all tax authority's perspective, we are assuming that our sales price and hence revenue is inclusive of sales tax. In the current period we calculate the tax we should have collected, deduct it from revenue (which is not ideal) and record it to a sales tax liability account and then remove the liability when the payment is made to a tax authority as follows:
Dr. Revenue
Cr. Sales Tax Liability
Dr. Sales Tax Liability
Cr. Cash
For our historical periods, we are under going various tax audits (I know so fun!!) we will have to make payments on overdue taxes that would have been our obligation to collect and remit in previous years. It doesn't follow that we can use the same logic as above to deduct from revenue, as the liabilities arose on revenues in prior years. I am stuck where we could classify this in the income statement and haven't seen any guidance that is particularly helpful in determining it. For context, these historical amounts are material, and we have a functional P&L, where as if we had a natural P&L, I would be in favor of presenting as its own caption.
One last unique situation, we offer a particular service and as a result of offering this particular service exposes us to a new indirect tax requirement. In this case, the service we provide is exempt from sales tax itself, however as a result of offering this service we are required to collect and remit tax on our customers sales for them! In this situation, we don't have a current period revenue to deduct it from as our service is not taxable nor is it the basis the tax amount is levied on. I have considered two alternatives: one being classified G&A on the weak basis it is a misc expense and doesn't fit our other two functions and the second being cost of goods sold as we wouldn't have this tax expense if we didn't offer the specific service, and it is causing me to think it is actually a direct cost of the service's revenue.
Dr. G&A expense (sales tax we should have collected in current period)
Cr. Indirect Tax Liability
Dr. Indirect Tax Liability
Cr. Cash
Or
Dr. COGs
Cr. Indirect Tax Liability
Dr. Indirect Tax Liability
Cr. Cash
Anyone encounter any of these situations or seen any guidance they think would be helpful for analyzing and determining where the amounts could be classified on the p&l?
Thanks!!
I am pondering a couple things, and would love anyone else's take. We are working on becoming tax compliant for sales and use and various VAT and other indirect taxes where we have a tax liability to collect and remit but are not yet doing so.
For the current period, where we should be collecting and remitting the sales tax, while not generally technically correct from all tax authority's perspective, we are assuming that our sales price and hence revenue is inclusive of sales tax. In the current period we calculate the tax we should have collected, deduct it from revenue (which is not ideal) and record it to a sales tax liability account and then remove the liability when the payment is made to a tax authority as follows:
Dr. Revenue
Cr. Sales Tax Liability
Dr. Sales Tax Liability
Cr. Cash
For our historical periods, we are under going various tax audits (I know so fun!!) we will have to make payments on overdue taxes that would have been our obligation to collect and remit in previous years. It doesn't follow that we can use the same logic as above to deduct from revenue, as the liabilities arose on revenues in prior years. I am stuck where we could classify this in the income statement and haven't seen any guidance that is particularly helpful in determining it. For context, these historical amounts are material, and we have a functional P&L, where as if we had a natural P&L, I would be in favor of presenting as its own caption.
One last unique situation, we offer a particular service and as a result of offering this particular service exposes us to a new indirect tax requirement. In this case, the service we provide is exempt from sales tax itself, however as a result of offering this service we are required to collect and remit tax on our customers sales for them! In this situation, we don't have a current period revenue to deduct it from as our service is not taxable nor is it the basis the tax amount is levied on. I have considered two alternatives: one being classified G&A on the weak basis it is a misc expense and doesn't fit our other two functions and the second being cost of goods sold as we wouldn't have this tax expense if we didn't offer the specific service, and it is causing me to think it is actually a direct cost of the service's revenue.
Dr. G&A expense (sales tax we should have collected in current period)
Cr. Indirect Tax Liability
Dr. Indirect Tax Liability
Cr. Cash
Or
Dr. COGs
Cr. Indirect Tax Liability
Dr. Indirect Tax Liability
Cr. Cash
Anyone encounter any of these situations or seen any guidance they think would be helpful for analyzing and determining where the amounts could be classified on the p&l?
Thanks!!