Gross sales and sales tax are tracked separately on your records
Gross sales means the total dollar amount of sales before you subtract anything — but it does not include sales tax. Sales tax is money you collect on behalf of the state or local government, not money you keep. When you ring up a $100 item and the customer pays $108 because of 8% sales tax, your gross sales are $100. The $8 goes into a separate account or category because you owe it to the tax authority.
The distinction matters because gross sales is what you use to calculate your business income, and sales tax is what you report and remit to your state. Mixing them together makes your tax filings wrong and can trigger an audit. Most point-of-sale systems and accounting software separate them automatically, but if you track sales by hand or use a basic spreadsheet, you need to keep them apart from the start.
Key Takeaways
- Gross sales are the pre-tax dollar amount of what you sold; sales tax collected is recorded separately and does not count toward your business income.
- Sales tax belongs to the state or local government, not to you, so it must be held in a separate account or ledger line until you remit it.
- Your accounting software or point-of-sale system should split these automatically, but manual record-keepers must separate them by hand.
- When you file your tax return, you report gross sales as revenue and sales tax collected as a liability you owe, not as income.
Why the difference matters for your tax return
The IRS and your state tax authority both care about this split. On your federal income tax return, you report gross sales as your business revenue. That number determines your taxable income after you subtract expenses. If you accidentally add sales tax to gross sales, you inflate your revenue and end up paying income tax on money that was never yours.
Your state also wants to know how much sales tax you collected so it can verify that you remitted the correct amount. When you file your sales tax return, you list total sales tax collected as a separate line. The state cross-checks this against what you paid. If your numbers do not match, the state may audit your records and charge you penalties.
How to separate them in your records
If you use accounting software like QuickBooks, Xero, or Wave, the system does this automatically. When you record a sale, you enter the pre-tax amount, and the software calculates and logs the tax separately. You never have to think about it.
If you use a point-of-sale register or cash register, most modern ones also split the amounts. At the end of the day, the register shows you total sales (before tax) and total tax collected. Write both numbers down.
If you track sales in a spreadsheet or notebook, create two columns: one for sales amount and one for sales tax collected. Add each sale to the correct column as it happens. At the end of the month, total each column separately. The sales column is what you report as revenue; the tax column is what you remit to the state.
What happens if you mix them together
Combining gross sales and sales tax inflates your reported revenue, which means you pay more income tax than you should. You also cannot accurately report how much sales tax you collected, which the state uses to verify your remittance. If the state notices the discrepancy, it may assess penalties for underreporting sales tax or overreporting income.
The error is straightforward to catch during an audit because the state has its own records of what you paid in sales tax. If your reported sales tax does not match what you remitted, the auditor will dig into your records. Fixing it after the fact is more expensive and time-consuming than getting it right from the start.
Sales tax on different types of transactions
Sales tax rules vary by state and by what you are selling. Most states tax tangible goods (physical items) but not services, though some states tax certain services too. A few states have no sales tax at all. Regardless of your state's rules, the accounting principle stays the same: the amount you keep is gross sales, and the tax you collect goes into a separate bucket.
If you sell in multiple states, each state's tax rate may be different. Your point-of-sale system or accounting software should be set up to explore the correct rate based on the customer's location. The software then separates the sales amount from the tax amount for each transaction, so you can report each state's tax correctly when you file.
Remitting sales tax to your state
When you file your sales tax return — usually monthly, quarterly, or annually depending on your state and sales volume — you report the total sales tax you collected during that period. This is the number from your tax column, not a calculation based on gross sales. You then send that amount to your state's tax authority.
Some states let you keep a small percentage of the sales tax you collect as a collection allowance, but this is rare and only applies if your state specifically offers it. In most cases, you remit 100% of what you collected. The state does not care what your gross sales were; it only cares that you collected and remitted the correct tax amount.
Frequently Asked Questions
If a customer pays $108 total, is my gross sales $108 or $100?
Your gross sales are $100. The $8 is sales tax, which you collected on behalf of the state. Your gross sales are the pre-tax amount the customer paid for the item itself.
Do I report gross sales before or after sales tax on my income tax return?
You report gross sales before sales tax. On your federal return, you list the pre-tax revenue. Sales tax collected is listed as a liability (money you owe the state), not as income.
What if my state has no sales tax?
If your state has no sales tax, gross sales and the total amount customers pay are the same number. You do not need to separate anything. However, if you sell to customers in other states that do tax your product, you may need to collect and remit tax for those states depending on your sales volume and your state's rules.
Can I use gross sales including tax to calculate my business expenses?
No. You calculate business expenses based on the actual pre-tax revenue you earned. Using inflated numbers (revenue plus tax) makes your expense percentages wrong and can raise red flags during an audit.
Does my accountant or bookkeeper handle this separation for me?
If you give your accountant or bookkeeper raw transaction data, they will separate sales and tax. If you give them already-mixed numbers, they can only work with what you provide. It is easier and cheaper to separate them yourself from the start using your accounting software or a straightforward two-column system.