How do I account for COGS items for which I paid taxes? I purchased some software that I'm reselling to a client. My supplier charged tax for the cost of goods.

jsummers · ‎December 10, 2018

Normally when I purchase a product for resale, my vendors do not add tax. I then add my markup and applicable taxes for the resold amount before invoicing the client. I recently purchased a product that I intend to resell but my supplier withheld taxes on the COGS amount. Once I add my markup and figure the taxes on the full sale amount, I need to decrement the taxes due by the amount that I paid my vendor. The only way I can figure to do that is to have two line items on the invoice. The first is the COGS amount with no taxes applied and the second is my markup with tax applied. But then I give my client visibility into my margins. Is there another way to do this without giving the client that visibility?

Rustler · ‎December 10, 2018

The IRS says any amount paid to get an item, including sales tax, shipping, etc or to make it ready for sale is part of item cost - so as far as the IRS is concerned it should be added to item cost and received at a price that includes all costs

States have what is often called a resellers permit, you download it, fill it out, give it to your vendor and then he can sell to you sales tax free for items you sell - that is the easiest way to deal with this in my opinion.

But if you want to track sales tax paid and claim a reduction in sales tax due when you file. When you receive inventory, on the expense tab, select a sales tax paid expense account (you will probably have to create it the first time).

This is the amount you will claim on the sales tax form, and this same amount has to be used to lower sales tax due in the pay sales tax module, using the adjust button.

This amount will not show on the sales tax liability reports though, you will just have to remember to use sales tax adjust.

View solution in original post

Rustler · ‎December 10, 2018

The IRS says any amount paid to get an item, including sales tax, shipping, etc or to make it ready for sale is part of item cost - so as far as the IRS is concerned it should be added to item cost and received at a price that includes all costs

States have what is often called a resellers permit, you download it, fill it out, give it to your vendor and then he can sell to you sales tax free for items you sell - that is the easiest way to deal with this in my opinion.

But if you want to track sales tax paid and claim a reduction in sales tax due when you file. When you receive inventory, on the expense tab, select a sales tax paid expense account (you will probably have to create it the first time).

This is the amount you will claim on the sales tax form, and this same amount has to be used to lower sales tax due in the pay sales tax module, using the adjust button.

This amount will not show on the sales tax liability reports though, you will just have to remember to use sales tax adjust.

Scottsgardens · ‎December 10, 2018

Rustler's response is correct, but depending on where you are located, the actual process of claiming the credit may be convoluted: specifically, if you are in a state that has several "district" taxes (county or city sales tax or even sub-sets of those) the amount of tax you are going to claim to reduce your next sales tax report might well need to be able to identify each component of the tax you paid to apply the credit into each "district". California sales tax is a nightmare with this.

Yes, create a separate GL to show "Sales Tax Paid on Resale Items", and this would most appropriately be a contra-liability account (a liability that normally would carry a debit balance), and then maybe prepare a spreadsheet to be able to support the reduction you claim on your monthly / quarterly / annual return.

I also recommend Don Patron Tequila or Jameson Irish Whiskey ....

Rustler · ‎December 10, 2018

crown royal, or chivas with the silver bullet as a chaser

SkinnyRaven · ‎December 10, 2018

Your question is not clear.

Glendig · ‎March 24, 2022

"The IRS says any amount paid to get an item, including sales tax, shipping, etc or to make it ready for sale is part of item cost - so as far as the IRS is concerned it should be added to item cost and received at a price that includes all costs"

Just to clarify, how should you enter the Vendor invoice for this transaction.

How are the tax and shipping costs recorded in the COA in this transaction?

MAGA24

Answer: Qb does not have a solution. You have to make your own. The fact that the old Desktop version had a solution for this and this new online version does not it a huge miss. The state of CA actually recommends paying the sales tax ahead so that you don't have a huge liability at the end of each quarter. You pay the use tax at time of purchase and you charge your client the tax to reimburse yourself. That is the easiest way for a small business to handle use tax. QB Online has failed to acknowledge this need even though the topic is all over searches with no clear or simple answer. If you call they will tell you to "ask your accountant". Accountants don't have an idea as to how to manipulate your software. They know taxes....

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How do I account for COGS items for which I paid taxes? I purchased some software that I'm reselling to a client. My supplier charged tax for the cost of goods.