Do you include sales tax in business expenses?

What is a sales tax expense?

A sales tax expense occurs when your business pays sales tax on goods or services it purchases for operations. This can include office supplies, utilities, or equipment that are not exempt from tax. However, sales tax collected from customers is not a business expense; rather, it’s money held temporarily before being remitted to the state.

How to categorize sales tax expenses

• Exclude sales tax collected from customers; record it as a liability until remitted to the tax authority.
• Include sales tax paid on non-exempt business purchases in the total expense amount.
• For bookkeeping accuracy, note the pre-tax and tax portion separately when entering expenses.
• If your accounting software supports it, enable automatic tax tracking to simplify reconciliation.
• Do not claim sales tax on items later refunded or used for personal purposes.

Examples of sales tax expenses

• Office Supplies: Sales tax paid on equipment, furniture, or materials used in business operations.
• Utilities: Taxes charged on electricity, gas, or phone bills.
• Services: Tax applied to cleaning, maintenance, or consulting services (in applicable states).
• Software & Subscriptions: Taxes on SaaS tools, digital services, or licenses.
• Vehicle Purchases: Sales tax paid on business-owned cars, trucks, or machinery.

Tax implications for sales tax expenses

• Sales tax collected from customers is not deductible; it must be remitted to the taxing authority.
• Sales tax you pay on your own business expenses is generally deductible if the underlying purchase is deductible.
• When claiming deductions, always include sales tax in the total cost of the expense rather than listing it separately.
• If your business files for sales tax refunds or credits, do not double-count these amounts as expenses.
• Keep all purchase invoices and sales tax filings for documentation and audit support.