How do I get a pre-tax credit to be treated using cash accounting rules?
Environment: Because I use cash accounting, sales tax collected is credited to my Sales Tax Payable account based on when my customer pays the invoice, not when I create the invoice.
Process: at the end of the quarter, I run a taxable revenue report that shows the pre-tax amounts. I report this to the state, then pay the sales tax calculated & due on that amount. This debits my Sales Tax Clearing account. After paying the tax, I run Pay Sales Tax, which credits my Sales Tax Clearing account and debits Sales Tax Payable. Of course, due to rounding per invoice, there can be a few cents difference between the sales tax on the pre-tax total for the quarter and the sum of the individual tax collected on invoices. The difference is made up by adjusting sales tax before Pay Sales Tax, at which time the few cents difference is debited/credited to a tax expense account so it becomes either a tiny expense or reduction in expense on my 1120S at the end of the year.
But all you accountants already know all of that.
Scenario: I billed a customer for an item and subsequently received a partial refund of $199 from my vendor for late shipment. I wanted to pass along the refund to my customer, but the original invoice included tax on that $199 as part of the orginal price, and I wanted to ensure that the credit also reduced the sales tax paid. The customer's tax rate is 7.7, so the tax on that portion of the invoice, although not separated out at the time, comes to $199 x .077, or $15.32, for a total of $214.32.
The next invoice had (a lot) more than $199 taxable items, so I added an extra taxable line item in the amount of -$199. This correctly reduced the invoice total by $214.32. So far, so good, at least, so it looked at the time, since I never thought to check the Sales Tax Payable account.
But then I got to the end of the quarter, when neither of these two invoices was paid yet. I dutifully printed my taxable revenue report, completed my state tax return, paid the tax, then went to Pay Sales Tax--and found an inexplicable difference of somewhere around that $15.32. Only then did I go back and drilled down on my taxable revenue report and found that it included revenue for the invoice that was not yet paid! Since I use cash accounting, that should never be the case, and it has never been the case in the past; when I have had to drill down, it has always included only paid invoices. But this drilldown was different; it reported taxable revenue for part of the value of items on the invoice. For example, it showed $20.26 taxable of a line item of $430.11, an amount that makes no sense. Looking at other items, it seems like it took the negative amount and distributed it across all items. So I aborted my Pay Sales Tax until I could figure it out.
I never did sort out exactly how it was calculating, but I finally went back, removed the negative amount from the second invoice and reduced the amount of the original item charge on the first invoice by $199. That way, there was no negative line item anywhere, but the combined total of the invoices remained constant. But it now reports the correct taxable revenue for the quarter. This, of course, does not match what I reported to the state, but I figure they will get their slice next quarter anyway. When I did Pay Sales Tax, I had to adjust out the difference.
But I may legitimately need to give a customer a credit sometime again in a way that reduces the taxable amount of an invoice but must be on a separate line because it is not a reduction of an existing line item but a separate pre-tax line item credit. Why did it report taxable revenue on an unpaid invoice just because it had a negative line item? How do I prevent such a mess next time? I think it is in the actual sales tax accrual process, not the report, since the sales tax revenue report is simply a report filtered to all Sales Tax Codes for the last quarter. With cash accounting, nothing should have affected that account for invoices not yet paid, regardless of whether the pre-tax amount was positive or negative.
