Should Sales Tax Be Added Back to Calculate Your EBITDA?
The term "EBITDA" denotes business earnings before interest, taxes, depreciation and amortization. This figure provides you with an overall picture of your business income, before you begin making adjustments that aren't directly related to your company's financial achievements, such as the book value that your equipment and property loses over time. The sales tax that you collect from customers should not be added back in to calculate your EBITDA because it is not actually part of your sales revenue from an accounting, tax or practical standpoint.
From an accounting standpoint, your sales tax is completely irrelevant to calculating either your company's gross revenue or net income. Although retail businesses are required to collect sales tax from customers and send these amounts to their state's revenue departments, these sales tax amounts are not included when you calculate your sales because they do not represent anything that you have actually sold. They are sums that your business handles and reports and not sums that that your business earns.
Although your business is required to collect sales tax on applicable sales, you are taxed on your revenue before adding in the sales tax, rather than your income with your sales tax included. EBITDA is a term for your pared down earnings, representing business income before you pay business taxes. Sales tax is not included in the business taxes that are subtracted to calculate EBITDA because it is not a tax that your business pays out of its own pocket, but rather a tax that your customers pay.
On a practical level, your business is required to act as a revenue collector for the state, charging sales tax and then reporting and remitting the sums you have collected. If you manage your business funds effectively, you will keep sales tax revenue you collect separate from the revenue you collect from sales. This separation helps you to avoid the common mistake of spending this stream of cash that was never yours in the first place. If you do, in fact, keep sales tax amounts separate from general business income, then you won't fall into the trap of treating it as part of your business revenue.
Your business may pay sales tax to other businesses on items that are generally taxed such as equipment that you will be using in business operations rather than reselling. These sales tax amounts are already included in the price of purchases that you list in your ledger and, therefore, do not need to be added back in. For example, if you by a $12 spatula which costs $13.20 with the sales tax, then your business will treat the entire $13.20 as the cost of the spatula.