GAAP Accounting Rules for Sales Tax on Discounts

by James Green

Some states employ a sales tax, which is a percentage of total sales posted by the company. As some companies employ a discount on some items, this reduces to total amount of tax dollars owed to the state. State governments use a store's monthly tax returns for sales tax assessment. The business then pays any relevant sales taxes to the state each quarter.

Sales Discounts

A sales discount is when a store lowers the price of a good to encourage more customers to purchase the product. Alternatively, a sales discount is found on an invoice. Normally, a customer has to pay all outstanding balances by a certain time. However, if the customer pays off the balance earlier, the store may apply a sales discount. For example, an individual receives an invoice from a store that states that he owes $10 within 30 days. But if he pays within 20 days, the store will apply a 1-percent discount to the final outstanding balance.

Recording Sales Discounts

A company that employs sales discounts will record the sale of the good, before the discount, in one account. In a separate account, the store will list the applied sales discount. A third account, called accounts receivable, lists all money owed to the business, including those listed on sales invoices. Stores employ this method as it helps them analyze how often their customers use the sales discount. Subtracting sales discounts and sales returns gives net sales. Net sales represents what the company has sold in dollar terms.

Sales Discounts and Tax

Many states employ a sales tax, which is a percentage of the total value of the good sold. Most states apply sales tax to a select group of goods, which usually excludes food. Customers pay sales tax to the retailer and not directly to the government. It is up to the retailer to forward the sales tax to the state government. This is where GAAP rules come into play. For the most part, governments collect sales tax quarterly. The state assesses the retailer's monthly income-tax returns and imposes a sales tax based on these returns.

An Example

States base sales tax on net income, which takes into account sales discounts. So, let's say that a business sold $1,000, $2,000 and $3,000 worth of goods in January, February and March. When factoring in sales discounts, and assuming that the business did not receive any returned goods, the net sales for the business would be $950, $1,890 and $2,760. Sales tax is then applied on the total of net sales for the quarter, which is $5,600. If the all the products sold by the store are applicable for sales tax, and the sales tax rate for the state is 10 percent, then the store would owe the state $560 in taxes for the first quarter.

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