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How do I figure out what sales tax rate to charge?

Sales tax rates vary by zip code and jurisdiction. Additionally, the sales tax rate can vary by product type. In some states, certain items are tax exempt, which means that sales tax is not charged. Companies like Avalara will provide a full listing of sales tax rates by zip code.

However, if you are unsure as to whether you are required to collect sales tax on your product, send an inquiry to the government entity that imposes sales tax in your state.

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  • What does it mean to remit sales tax to the government?

    Sales tax is pass thru for the company, which means they collect the cash from the customer and then pass it along to the government. When a company remits sales tax to the government, it simply means they are sending the cash to the government. As you can see in the visual below, the money is collected by the company and then “remitted” or sent to the government (tax authority). The company sends 100% of the sales tax collected to the government.

  • What is the journal entry for a consumer to record sales tax?

    As a consumer or buyer, you will likely be charged a sales tax on your purchase (note that some items are exempt from sales tax). For example, if you bought a glass of wine, part of your cash cost would be for the wine and part would be for sales tax. The sales tax should be recorded as a separate expense in the financial statements. The visual below is a reminder that only a buyer would record sales tax expense. If you are a seller of good or services, you would not record any sales tax expense for the sale of those goods or services. Sales tax is a pass through cost for a seller.

  • What is the journal entry to record sales tax payable?

    As you can see in the visual below, when a company collects sales tax from a customer, they would credit sales tax payable. Sales tax that has been collected represents a liability until the company remits the cash to the government. When a company collects sales tax, there is no income statement impact.