How account for State Sales Tax later refunded?

I don't prepare any NY sales tax returns, so my answer may not be correct. If I understand your post, you have to pay sales tax on purchases you make which are later determined to be exempt from sales tax. You then get that sales tax back by taking a credit against the sales tax you collect on cost/services you sell when you transmit them to NY. If so, then you record the sales tax you pay on purchases to the same bookkeeping account you use for sales tax you collect for NY. I would expect this account would not appear on your 1120S since it's a trust account for NY. (More precisely, it wouldn't appear in the P&L part of the 1120S. It would appear in the balance sheet.)

Ira Smilovitz, EA

In reply to "ira smilovitz" who wrote the following:

Thanks so much for your response!

In reply to "ira smilovitz" who wrote the following:

Actually, I'm a little confused by your suggestion. I've done my own 1120S for many years, but I'm not an accountant. As I understand it, every expense leaving our checking account has its place on the 1120S. If it's not deductible in any way, then it gets passed through as taxable income to me as a distribution on line 16d on Schedule K. Since the Sales Tax paid on certain materials (that is ultimately returned) leaves the account, but is not actually deductible, would I put it in the expense column (using Excel) that is ultimately a 'distribution'? Thanks in advance for any suggestions!

Your understanding is wrong. Not every expense leaving your checking account has a place on the 1120S, because not every outflow of cash from your checking account is an expense. For instance, if your S-Corp has employees, the tax you withhold from their paychecks is not an expense for the S-Corp, and when you remit the withholdings to the IRS/state/etc. it doesn't appear on your 1120S as an expense or a distribution to you.

Ira Smilovitz, EA

You have some incorrect assumptions, and really should be using a tax professional (CPA or Enrolled Agent) to do your taxes. Because you have been doing them incorrectly. First, every expense is not deducted - there are nuances. Some expenses may be for capital expenses, which get amortized over a number of years. If you borrowed money and repay it, the repayment is not a deductibe expense (though interest charges you are are deductible).

When you receive sales taxes, that money goes into a special account, and does not get counted either as part of your income or on your balance sheet. It's not your money, after all - you're just holding it for the government.

I also don't practice in NY, so this process doesn't make a lot of sense to me. In most states the consumer (even if it's a business) pays sales tax on what it buys and uses. It's only when it buys for resale (which resale will result in the collection of sales tax) that the purchase is sales-tax free.

But if that's really the way they do things, then when you buy something, you wouldn't include the sales tax you pay in that expense. You would keep a running total of all sales taxes paid and net them against sales taxes you would be required to pay. At the end of the year if you paid more than you received, I'd guess you would get a deduction for that, but if you received more than you paid, the balance would go to the government so you wouldn't be ahead.

You really need to talk to a local tax pro who is familiar with sales taxes. The way you describe this seems really screwey. If you look at the web site of the New York State Department of Taxation, what they describe is nothing like what you describe. They say you get a credit but only for sales taxes you overpaid, paid by mistake, or collected but repaid to your customers. That is a very mainstream approach, and much different from what you seem to think the process is.

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I think the sales taxes you pay when you purchase goods is a deductible expense. It can either be part of your cost of goods sold, or taxes paid. If you never resell that 2x4, of course the sales tax is a deductible expense to you.

You may not always be able to recover that sales tax, as a sales tax, from your customer. For capital improvements in NYS, no sales tax is to be charged by you. So, you have to treat the sales tax paid by you as a deductible expense, and make sure you bill your customer enough to make a profit after recovering the total cost of the material you purchase, including sales tax.

When you charge sales tax to a customer, when you receive it you put it in your bank account with a balancing entry in an accrued sales taxes account.

When you remit your sales taxes with your sales tax return, you write a check and make a balancing entry deducting it from your accrued sales taxes account.

If you get a credit for sales taxes you originally paid when purchasing material, you will take a credit on your sales tax return and treat that credit as income to offset the deduction you originally took for those sales taxes you paid.

In reply to "Stuart O. Bronstein" who wrote the following:

I?ve been filing New York State Sales Tax returns since 1980. It used to be that you could provide a Resale Certificate to a vendor when purchasing supplies that would remain part of the job completed, in our case fertilizer and other lawn treatment products. About 5 years ago, they changed the law, and require that you pay the Sales Tax and then deduct it on an accompanying form AU-11 to the ST-100 Sales Tax return. The line where the Sales Tax amount is deducted is called ?The materials remained tangible personal property after installation?. I?ve confirmed this procedure with the NY State Sales Tax department. In fact, we were audited this year on this very issue because some businesses were incorrectly providing Resale Certificates to avoid the whole issue. It?s idiotic, but that?s New York State. I?m very aware that some items must be depreciated, and therefore handled differently than fully deductible expenses. I?m also familiar with your comment on how loans are handled. Your link to the NYS form doesn?t account for the additional AU11 required for this type of credit. I may take your suggestion to talk to a local CPA. Thanks again for taking the time to try to help us.

In reply to "ira smilovitz" who wrote the following:

Correct me if I?m wrong, but gross salary amounts go on line 7 and 8 of the

1120S, which include employee withholding taxes. The Employer portion paid is deducted on line 12. You said the employee withholding doesn?t appear on the 1120S, but it does appear as part of the gross wages expense. Am I missing something?