Sales tax payable is a current liability account that holds the sales tax a business has collected from customers but has not yet sent to the state. The money never belongs to the business; it is held in trust for the taxing authority and sits on the balance sheet until the next return is filed and paid. Because states classify this money as a trust fund obligation, mishandling it can expose both the company and the people running it to penalties, interest, and personal liability.
Where It Sits on the Balance Sheet
Sales tax payable belongs with other current liabilities such as accounts payable and accrued wages. “Current” means the obligation will be settled within the normal operating cycle, which for sales tax is almost always a month, a quarter, or at most a year.
It is not an expense. The tax passes through the business, so it does not reduce profit and does not appear on the income statement as a cost. Keeping the liability on its own line prevents the company from overstating available cash or net worth. Generally Accepted Accounting Principles require that separation so auditors, lenders, and investors can see exactly how much of the cash on hand is already earmarked for the government.
Why It’s Called a Trust Fund Tax
Most states treat collected sales tax as money held in trust for the state treasury. If the business fails to remit it, state law generally allows the government to pursue the individuals who controlled the funds, not just the entity. Corporate officers, directors, and anyone who decided which bills got paid can be held personally liable. In sole proprietorships and partnerships, the owners are individually liable for all collected and uncollected sales tax.
How to Record It at the Point of Sale
Each taxable sale produces a two-part journal entry. Debit cash (or accounts receivable) for the full amount the customer paid. Credit sales revenue for the pre-tax price. Credit sales tax payable for the tax portion.
On a $200 sale at a 7% combined rate, the customer pays $214. The entry debits cash $214, credits sales revenue $200, and credits sales tax payable $14. That $14 stays in the liability account until the business sends it to the state.
The rate depends on where the sale takes place, or for remote sales, where the buyer is located. Statewide rates range from 2.9% to 7.25%, and once local city, county, and transit district taxes stack on top, combined rates can exceed 10%.1Tax Foundation. State and Local Sales Tax Rates, 2026 Alaska, Delaware, Montana, New Hampshire, and Oregon impose no statewide sales tax, though some Alaskan localities levy their own.
Pulling the Tax Out of a Tax-Inclusive Price
If the price you quoted already includes tax, divide the total by one plus the tax rate expressed as a decimal to find the pre-tax portion. A $107.50 total at a 7.5% rate works out to $107.50 รท 1.075 = $100.00 in revenue and $7.50 in sales tax payable. The liability account has to reflect the exact tax portion, not the full receipt.
Rounding Fractional Cents
Tax calculations frequently produce amounts between whole cents. The Streamlined Sales Tax Agreement recommends carrying the tax to the third decimal and then rounding: below half a cent rounds down, half a cent or more rounds up.2Streamlined Sales Tax Governing Board. Rounding Issue Paper States outside the agreement may follow different rules, but this is the most widely used method.
When You Have to Collect in the First Place
A business only has to collect sales tax in jurisdictions where it has “nexus,” a sufficient connection to the state. Before 2018, nexus required a physical presence such as an office, warehouse, or employee in the state. In South Dakota v. Wayfair, Inc., the U.S. Supreme Court held that a state can require collection based purely on the seller’s economic activity in the state.3Supreme Court of the United States. South Dakota v. Wayfair, Inc.
The South Dakota law at issue applied to sellers delivering more than $100,000 in goods or services into the state, or completing 200 or more separate transactions there, each year.3Supreme Court of the United States. South Dakota v. Wayfair, Inc. Every state with a sales tax has since adopted its own economic nexus threshold. The $100,000-in-annual-sales figure is the most common, used by roughly 40 states, though some set higher thresholds or add a transaction-count test.
Once you cross a threshold in a state, you have to register for a sales tax permit there and begin collecting. Registration is usually free or costs a nominal amount and happens through the state department of revenue’s website. Get the permit before you start charging tax.
Sales Through an Online Marketplace
Nearly all states with a sales tax have marketplace facilitator laws that put the collection and remittance burden on the platform rather than the individual seller. If you sell through Amazon, eBay, Etsy, or a similar marketplace, the platform is generally treated as the retailer for tax purposes on those transactions, collects the tax from the buyer, and sends it to the state.
You are generally not liable for tax on marketplace-facilitated sales as long as the platform collected and paid the correct amount, but keep documentation showing the marketplace was registered and handled the tax. Any sales you make outside the marketplace, such as through your own website, remain your responsibility.
Exemption and Resale Certificates
Not every sale is taxable. Common exemptions include sales to nonprofits, sales to another business that will resell the goods, and certain product categories like groceries or prescription medications, which vary by state. When a buyer claims an exemption, you must collect and keep a valid certificate.
A resale certificate generally has to include the buyer’s business name and address, their sales tax permit number (or an explanation of why they don’t hold one), a description of the property being purchased, a statement that the purchase is for resale, the date, and the buyer’s signature. Words like “nontaxable” or “exempt” by themselves are not enough; the certificate has to specifically say the goods are for resale.
A seller who accepts an exemption certificate in good faith is typically protected if the buyer later misuses the goods. A seller who accepts a certificate they know to be fraudulent, or who collects no certificate at all, can be held responsible for the uncollected tax. Many states let you verify a buyer’s permit number online or by phone through the tax agency.
Filing, Paying, and Clearing the Liability
States assign a filing frequency, monthly, quarterly, or annually, based on how much tax you collect. A state might require monthly filing above $8,000 in estimated annual liability, quarterly between $2,000 and $8,000, and annual below $2,000. The exact thresholds vary, and most states will move you to a different frequency if your volume changes.
Due dates vary too. Many states set the deadline on the 20th of the month following the reporting period, but some use the last day of the month and others pick different dates. Each state publishes a filing calendar, and missing the deadline triggers penalties even on small balances.
Returns usually have to break sales down by jurisdiction, because state, county, city, and special districts each may charge their own rate. Most states require electronic filing through an online portal, with payment by ACH debit, ACH credit, or credit card. The portal issues a confirmation number or receipt as proof of timely filing.
Once payment clears, the sales tax payable balance drops to zero, or to whatever has already accumulated for the next period. The cycle is complete: collected, held as a liability, transferred to the state.
What Happens If You’re Late
Late filing and late payment are penalized separately. Most states charge a percentage-based penalty on the unpaid tax, commonly around 5% per month the balance stays outstanding, plus daily interest until paid. Some states add a flat minimum penalty for failing to file on time regardless of the amount owed.
For persistent nonpayment, states can file a tax lien against business property, revoke the sales tax permit (which effectively shuts down retail operations), or seize bank accounts. Because the money is a trust fund obligation, the individuals who controlled it, not just the entity, can be personally liable for the amount owed. Willful failure to remit can bring criminal charges in many states, with potential felony prosecution for large amounts or repeated violations.
Vendor Collection Allowances
Close to 30 states offer a small financial incentive, called a vendor discount or collection allowance, for businesses that file and pay on time. The discount typically runs from 0.25% to 5% of tax collected, depending on the state and the amount remitted, and is meant to offset the administrative cost of handling the tax for the state. File late and you forfeit the allowance entirely.
Records You Need to Keep
The IRS requires businesses to keep records supporting any item on a tax return for as long as the period of limitations stays open, generally three years from the filing date. That period stretches to six years if more than 25% of gross income goes unreported, and has no limit at all for fraudulent or unfiled returns.4Internal Revenue Service. Topic No. 305, Recordkeeping Many states set their own retention rules that can run longer, so keeping sales records, exemption certificates, and filed returns for at least six years is a common precaution. Your documentation should cover transaction-level sales data, copies of all filed returns, exemption and resale certificates from buyers, and records of payments made to each taxing jurisdiction.