What expense category are sales and use taxes?
There is no definitive answer to this question, as sales and use taxes can fall into multiple expense categories depending on how your business tracks and reports expenses. However, we generally recommend categorizing sales and use taxes as a part of your "Cost of Goods Sold" (COGS) expenses.
COGS is the broadest category for expenses related to the sale of your products or services. This includes not only the cost of the actual goods or services themselves, but also any taxes or fees associated with the sale. For businesses that sell products, this would also include things like shipping and packaging costs. For businesses that provide services, this might include things like travel expenses or materials used in the service.
While sales and use taxes could technically be classified as their own separate expense category, we find that it is simpler and easier to track them as part of COGS. This way, you can get a complete picture of all the costs associated with each sale, and can make more informed decisions about pricing and margins.
What if My Accounting Software Doesn't Have a COGS Category?
If your accounting software doesn't have a COGS category, you can create your own custom category for sales and use taxes. Just be sure to label it clearly so that you and your team know what it covers. You might also want to consider creating separate categories for other types of expenses related to the sale of your products or services.
Keep in mind that there may be other expenses associated with the sale of your products or services that are not sales and use taxes. For example, if you sell products online, you may be responsible for collecting and remitting state sales tax, as well as any applicable local taxes. These should be reported separately from sales and use taxes.
You should also be aware that some states have different categories for sales and use taxes. For example, in California, sales tax is imposed on the retail sale, lease, or rental of tangible personal property, as well as certain services. Use tax, on the other hand, is imposed on the storage, use, or consumption of tangible personal property in California.
Finally, keep in mind that the way you categorize your expenses can have a big impact on your business's financial statements. If you have any questions about which category is right for your business, we recommend talking to your accountant or financial advisor.