Reporting

Do I subtract sales tax from revenues and report that as sales? or do I pay income on sales tax collected?

Thanks

The sales tax you collected from your customers is included in your gross income. The amount of sales tax you paid to the state is deducted as a business expense for taxes paid.  If you pay over to the state/local government all the sales tax you collect in the same tax year you collected it, the result is a wash and has no effect on your income tax liability.

But..I don't understand how I have to pay income on money that is not part of sales. Say I sold 107,000 and 7,000 went to the state, is doesn't seem fair to pay income taxes on 107, 000. Even though If I deduct the sales tax as an expense, I still enda up losing.

Thanks

Let's say the sale price of the goods sold was $100,000 and you collected $7,000 in sales tax, so your total receipts were $107,000. You turn over the $7,000 to the state that same tax year. Let's say our cost of goods sold was $70,000 and, for simplicity, you had no other expenses. Your return would show $107,000 of receipts less 70,000 cost of goods sold and less $7,000 for sales taxes paid. Your net income on which you'd pay tax is therefore 107,000 - $77,000 = $30,000.

Now let's say there were no sales tax in your state and you simply sold the $100,000 worth of goods and had the same $70,000 cost of goods sold. Your net income on which you pay tax is now $100,000-$70,000=$30,000.

So, you see, it comes out the same either way. You do not lose out by including the sales tax and then deducting it. As I said, it's a wash so long as you paid over all the sales tax you collected in the same tax year that you collected it.