Sales Tax

In many countries certain organization are required to charge a sales tax.  In the United Kingdom this is “VAT” and in France “TVA”. In this section we shall use the generic name sales tax. As a consequence the amount that they charge their customers for goods and services supplied would increase by the addition of sales tax. 

The rate of sales tax varies between countries and will also vary between the nature of the goods and services supplied. The sales tax collected does not belong to the organization that charges and collects it and the tax must therefore be remitted to the tax authorities on a regular basis.  It is a tax that ultimately must be paid to the tax authorities. Because it does not belong to the organization collecting it, it does not affect the value of its sales. However, it does mean that customers will have to pay to the organization the full amount, including the sales tax.

The organization may also have to pay sales tax itself on goods and services that it buys. This sales tax paid can normally be reclaimed. Even though the organization has to pay the suppliers the full amount, if the sales tax is reclaimable then it does not affect the value of the item purchased.

Such organization will, as a consequence, be both receiving and paying sales tax. The organization may offset sales tax paid against the sales tax received from customers, and only the difference is payable to or by the tax authority.  The sales tax paid to suppliers is therefore an asset (receivable) and the amount received from the customers is a liability (payable), until they are offset when a net asset or (more likely) a net liability arises.  Sales tax received can be referred to as output sales tax and sales tax paid could be referred to as input sales tax.

Questionnaire:

• What is sales tax?
• What is input and out put sales tax.