2300liabilityNormal balance: Creditbusiness2300 — Sales Tax Payable
When a customer pays sales tax on an invoice, that money was never really yours — you collected it on behalf of a state or local tax authority, and it belongs here until it is remitted, not in your revenue at all. This is one of the more important distinctions in the whole chart: sales tax collected is not income, no matter how it arrives alongside a payment that is.
As a liability, Sales Tax Payable carries a normal credit balance. Each taxable sale credits this account for the tax portion while the pretax sale amount credits actual revenue in Sales (4000) or Service Revenue (4100); remitting the collected tax to the state debits this account back toward zero.
Whether a specific product or service is even taxable, and at what rate, is entirely a matter of state and local law — it varies enormously by jurisdiction and by what is being sold. This chart gives you a place to hold the liability; it does not tell you whether or how much to charge, which is worth confirming against your state's own revenue agency or an accountant, especially if you sell across state lines.
What belongs here
- sales tax collected on taxable invoices
- use tax accrued on an out-of-state purchase where applicable
- an adjustment for a timely-filing discount or credit a state offers for on-time remittance
- a correction when the wrong tax rate was applied to a prior invoice
What does not belong here
- the pretax portion of a sale — that is genuine revenue, in Sales (4000) or Service Revenue (4100)
- income tax owed on the business's own profit — an entirely different tax, with no account in this chart, generally paid personally from after-tax draws rather than as a business expense
- the actual remittance payment sent to the tax authority — that clears this liability rather than adding to it
Where it shows up
Appears on the balance sheet as a current liability, relevant only to businesses selling taxable goods or services in a sales-tax jurisdiction. It should track closely with recent taxable sales.
Common questions
- Is sales tax collected part of my revenue?
- No. It was collected on behalf of a tax authority and never belonged to the business — only the pretax sale amount is real revenue.
- How do I know if what I sell is taxable?
- That depends entirely on your state and local rules and what specifically you sell. Check with your state's revenue agency or an accountant, especially if you operate in more than one state.