Level 1

How do I track sales tax paid to a vendor to deduct from taxes paid to government?

Level 15


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

Level 1


I work for an Interior Design firm in California and there are some retail purchases we make for customers where we cannot supply our resale license.  My understanding is that I would code the sales tax paid to a COGS account and then deduct it on my sales tax return.  However, in CA, they ask you to deduct the amount of the actual sale (that you paid taxes on) from the gross sales on your return.  Wouldn't I then need to track the sales I paid taxes on separately on my P&L and not just the taxes I paid on them?
Level 15


That would work for sales tax reporting but the issue is going to be whether or not the item that you paid sales tax on, is part of a larger sale which has sales tax applied to.  Say you buy with sales tax a wall sconce, and include it with other items being sold too - be really hard to pull that info out for that one item.

I would make life easy on myself, and just include the sales tax paid as part of the cost, and adjust my margin with that in mind.
Level 15



"However, in CA, they ask you to deduct the amount of the actual sale (that you paid taxes on) from the gross sales on your return."

Set up an Item for this; make an Other Charge type item linked to a COGS account and name this item "Sales Taxes Incurred." Now, on the purchase for anything where you paid sales taxes inbound, use this item listing Quantity as the decimal tax rate and Cost as the Gross Price that was taxed. Let's use Rustler's example:

Fabric item (two sided, if you buy and sell it) $5,000
Sales Tax Incurred item $5,000 Cost @ .07 = $350.

Now you can report on that Item, seeing Cost and Tax (as Quantity) for purchase reporting.
Level 2


Hey Rustler,

The "expense" account used for the sales tax that was paid on a vendor bill, would that be an "expense" or "COGS"?  We're in a similar boat.  The Wayfair court decision has changed the way some things are done in the dealer/vendor/customer transaction.  Depending on whether a vendor has nexus in a state or not determines if tax is added to the dealer's cost, regardless of a resale cert on part of the dealer.  As the dealer, if we are charged tax because of nexus, then we are allowed to pass on the cost of the tax to the customer, but not listed as a tax (listed as a "vendor paid tax incurred" or such).  So now I have to account for sales tax to certain vendor bills that we incur, but I'm not sure how that needs to be accounted for, especially since we don't want to pay tax twice, once by us and once by the vendor.  Example, we purchased product for a client in CA, and the vendor, although headquartered in NY, has nexus in CA.  We were charged tax by the vendor which covers the tax liability for the gear for CA, then we charged the customer the amount of the tax as a separate line item, the gear being dropshipped.  We used a "product/service" category for this line item, and it accounts to "Reimbursable Expenses", which now sounds incorrect.  Not sure how to set this up.  Would we  want to use the same account for both the cost and income?  Or do I need to set up separate accounts for what we're charged and what we charge out to the customer?  And how would these differ, if so, from when we have to charge the customer taxes (even some 501(c)(3) customers thanks to the Wayfair decision) even if we were not charged taxes by the vendor?  I understand your reply, but not sure what account to set up for the product/service line item to report to.  And what account to create for the taxes paid to the vendor, assuming these two need to balance?  Make sense?  Thanks so much.              

Level 1


This is a great answer however it leads to my question. When I run my sales tax report, even though i have created a line item for taxes pd, i dont see it deducted from sales tax due? How/where does quickbooks shows taxes pd to be deducted from sales tax due?

QuickBooks Team


Thank you for joining the thread, @kellyco.


Let me provide additional insights about the sales tax adjustment in QuickBooks.


To get the sales tax item to deduct on the sales tax due. You'll have to create a sales tax liability adjustment and use the account affected by the sales tax account.


Here's how to adjust sales tax due:


  1. Go to the Vendors menu.
  2. Choose Sales Tax and select Adjust Sales Tax Due.
  3. Enter the necessary information in the Sales Tax Adjustment window.


You can read this article for additional information about the process: Process sales tax adjustment.


Also, you can check this article on how to troubleshoot issues while managing sales tax in QuickBooks Desktop: How to resolve common sales tax issues.


You can add a comment below if you have any other questions. I'm here to help. Wish you all the best.