Accrued sales tax is the sales tax a business has collected from its customers but has not yet sent to the state or local government. It sits on the balance sheet as a current liability, usually labeled Sales Tax Payable or Accrued Sales Tax, until the next filing deadline zeros it out. Because combined state and local rates run from under 2% in a few places to over 10% in the highest-taxed jurisdictions, even modest sales volume can build up a meaningful balance quickly.1Tax Foundation. State and Local Sales Tax Rates, 2026
Money You’re Holding, Not Money You Earned
The sales tax a customer pays at checkout never belongs to the business. The seller is a collection agent for the state, and often the county and city on top of that. Most states classify collected sales tax as trust funds held on behalf of the government. That label matters: if the money is spent or not remitted, the individuals who control the company’s finances can be held personally liable for the shortfall, even when the business is a corporation or LLC. That personal exposure catches many owners off guard.
The obligation begins the moment a taxable sale is completed, not when the filing deadline rolls around. If a customer buys on credit and hasn’t paid yet, the tax is still accrued as of the sale date under accrual accounting. The business owes the government money it may not have received in cash, which is a real consideration for anyone who invoices rather than collects at the point of sale.
Calculating What You Owe
Start with which sales are taxable. Not every transaction triggers sales tax. Common exemptions include purchases for resale (where the buyer provides an exemption or resale certificate), sales to qualifying nonprofits, and sales of items like groceries or prescription drugs in some states. If you don’t collect a valid exemption certificate, you can end up owing the tax yourself when an auditor questions the exemption later.
Once you’ve isolated taxable revenue, apply the combined rate for the location of the sale. That rate is stacked: a state rate, sometimes a county rate, and often a city or special-district rate. Five states impose no statewide sales tax at all (Alaska, Delaware, Montana, New Hampshire, and Oregon), though some Alaska localities levy their own. Among states that tax sales, the average combined rate runs from roughly 4.5% to just over 10%.1Tax Foundation. State and Local Sales Tax Rates, 2026
How Discounts and Coupons Change the Tax Base
The source of a discount matters. A store coupon or retailer-issued discount reduces the price the customer actually pays, so tax applies only to the reduced amount. Sell a $30 item with a $5 store coupon and the taxable amount is $25.
Manufacturer coupons work differently in most states. Because the manufacturer reimburses the retailer for the coupon value, the retailer ends up with the full price. Most states tax the full pre-coupon price, not the amount the customer hands over. A handful, including Texas, treat all coupons the same and tax only what the customer actually pays. Rebates paid directly to the customer after the sale don’t reduce the base either, since the seller collected the full price at the register. Getting this wrong means under- or over-accruing, and both create problems at filing time.
Recording the Liability on Your Books
The journal entry for a taxable sale splits the collected amount between revenue and liability. Sell a $1,000 item at an 8% combined rate and the customer pays $1,080. The entry debits Cash (or Accounts Receivable) $1,080, credits Sales Revenue $1,000, and credits Sales Tax Payable $80. Revenue never includes the tax portion, so the income statement reflects what the business actually earned.
Under GAAP, businesses have an accounting policy election (codified in ASC 606-10-32-2A) to present sales taxes collected either on a gross basis (included in revenue then backed out as an expense) or a net basis (excluded from revenue entirely). Most businesses use the net approach because it’s simpler and avoids inflating the top line. Whichever method you pick, apply it consistently across all similar taxes.
The Sales Tax Payable balance grows with each taxable sale during the period. When you file and remit, debit Sales Tax Payable and credit Cash. If the ledger balance doesn’t match the amount on the filed return, something went wrong upstream, and that discrepancy should be tracked down before it compounds.
Cash Basis vs. Accrual Basis Timing
How you report income affects when sales tax hits the books. Under the accrual method, the liability is recorded when the invoice is created, regardless of when the customer pays. Under the cash method, it’s recorded when payment arrives.
The distinction matters most for businesses that extend credit. If you invoice $1,000 plus $60 in tax in August but don’t get paid until September, accrual reporting puts the $60 on your August return; cash reporting pushes it to September. Some states require sales tax to be reported on an accrual basis regardless of your income-tax method, so the choice isn’t always yours. Confirm with your state’s revenue department which method applies.
Don’t Overlook Use Tax
Use tax is the mirror image of sales tax, and it generates more audit assessments than almost anything else. When a business buys a taxable item and the seller doesn’t charge sales tax, the buyer typically owes an equivalent use tax to its home state. This shows up with out-of-state vendors, online purchases where the seller had no collection obligation, and items originally bought tax-free for resale that get pulled off the shelf for the company’s own use.
The rate is usually identical to the sales tax rate that would have applied locally. The business self-assesses, records the amount as a liability (debiting an expense account and crediting Use Tax Payable), and remits it on the sales and use tax return. Many businesses miss this entirely, which is exactly why auditors look for it. Equipment, supplies, or software bought from vendors who didn’t charge tax almost certainly need a use tax accrual.
When You Have to Collect for Other States
Before 2018, a business generally needed a physical presence in a state before that state could require sales tax collection. The Supreme Court changed that in South Dakota v. Wayfair, holding that a state can require remote sellers to collect and remit based on economic activity in the state, without any physical presence.2Supreme Court of the United States. South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018)
The South Dakota law at issue set the threshold at $100,000 in annual sales or 200 separate transactions delivered into the state. Most states adopted similar thresholds, and as of 2026 the majority use a $100,000 annual sales threshold, though some set theirs higher. Once you cross a state’s threshold, you must register there, begin collecting, and start accruing sales tax for that state going forward.
One boundary worth knowing: if your sales flow through a large platform like Amazon or Etsy, marketplace facilitator laws generally shift the collection and remittance obligation to the platform itself. Every state that imposes a sales tax now has some form of marketplace facilitator law in place.3Tax Foundation. Marketplace Facilitator Laws Past, Present, and a Better Future Direct sales through your own website remain your responsibility.
Filing and Remitting
How often you file depends on how much tax you collect. States assign filing frequency based on liability volume, and tiers vary by jurisdiction, but the pattern is consistent:
- Monthly filers collect above a set threshold (often $300 to $1,200 per month) and typically file by the 20th of the following month.
- Quarterly filers are mid-volume, filing four times a year.
- Annual filers are very low-volume, usually filing in January for the prior calendar year.
Most states require electronic payment through their online portal or by electronic funds transfer. Paper checks are becoming less common, and some states charge a fee or deny certain benefits for non-electronic payments.
Vendor Discounts for On-Time Filing
Close to 30 states offer a small financial reward for filing and paying on time, commonly called a vendor discount or timely-filing discount. It lets the business keep a small percentage of the tax collected, typically 0.25% to 5% of the amount due, subject to a cap per reporting period. For high-volume retailers the savings add up. Miss the deadline by a day and the discount is gone.
Penalties, Personal Exposure, and Audits
Sales tax penalties are among the harshest in the tax world, partly because the money was never the business’s to begin with. The most common structure is a failure-to-file or failure-to-pay penalty of 5% of the unpaid tax for each month or partial month the return is late, capping at 25% of the total due. Interest accrues on top, compounding daily in many states.
Beyond the money, willfully failing to remit collected sales tax can be treated as a criminal offense in some jurisdictions, since the business is spending funds it held in trust. The responsible individuals can face personal liability for the unpaid tax, penalties, and interest, and this debt does not dissolve in a corporate bankruptcy.
Most states audit sales tax on a three-year lookback measured from the return’s due date or actual filing date, whichever is later. Understate liability by more than 25% and the window can stretch to six years. File no return at all and there is typically no statute of limitations; the state can reach back indefinitely.
Auditors look at a predictable set of items: missing or incomplete exemption certificates, use tax that was never accrued on business purchases, rate errors in jurisdictions with overlapping tax districts, and gaps between reported revenue and bank deposits. Exemption certificate problems generate more assessments than any other single issue, because the burden of proving a sale was exempt falls on the seller.
Retain sales invoices, exemption certificates, purchase records, filed returns, and related working papers for at least three years from the filing date of the return they relate to. Many tax professionals recommend four to six years to cover the extended lookback that applies when understatements come to light.