Many states assess a sales tax to raise revenue for state programs. Exactly what type of sale is taxed varies from state to state. Some states charge sales tax only on the sale of goods, while others also charge sales tax on services. It is the responsibility of the seller to know and understand the sales tax regulations of his state, to collect the required sales tax and to remit the collected sales tax to the state.
Sales tax collected and sales tax payable are the same thing, as all sales tax a business collects must be sent to the state. This may not be obvious when a business owner looks at the general ledger after sending a check to the state and sees that "Sales Tax Payable" is not zero. It's all a matter of timing. A business collects sales tax over a period specified by the state and pays it when it's due. Meanwhile, that tax revenue remains in the "Sales Tax Payable" account. For example, a state sales tax period may run from Jan. 1 through March 31, with April 20 the latest postmark date for the report and check. If your business made $50,000 in sales during that period, and the tax rate is 8 percent, you must submit your report to the state with a check for $4,000 postmarked no later than April 20. Assuming you continue to do business, you made sales from April 1 to April 20 and have collected 8 percent sales tax on those sales. April 1 to April 20 sales tax revenue sits in "Sales Tax Payable" until you file your next quarter’s report. Correct journal entries are important to make sure you submit the correct amount of sales tax.
Sales tax collected is the actual amount a business collects from a customer at the time of sale. If $100 worth of merchandise is sold in a state that has an 8 percent tax rate, the seller must charge the customer a total of $108. The buyer pays $100 for the merchandise and $8 in sales tax, which the seller collects for the benefit of the state.
When a sale is made, the company needs to keep track of the transaction by recording it in the company’s general ledger. The total sale is debited to "Accounts Receivable." The sale portion of the transaction is credited to "Sales" and the sales tax collected is credited to "Sales Tax Payable."
"Sales Tax Payable" is a current liability category in a company’s general ledger. It tracks the total amount of sales tax a company has collected that must be remitted at regular intervals to the state in which the business resides.
States have specific dates when sales tax must be paid. When a business submits its sales tax report to the state, a check for sales tax due to the state must be included. The general ledger journal entry for this transaction is debiting "Sales Tax Payable" and crediting "Cash."