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Old 04-04-2009, 03:28 PM
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Sales tax accounting in Schedule C

My wife started up a Mary Kay business in 2008, so now I'm trying to do a Schedule C for the first time. We chose the simpler cash method of accounting since we qualify, and therefore use cost to value her inventory. It's fairly straightforward, until I consider sales tax. (in State of Tennessee for reference)

The way it works is she pays sales tax to MK on the retail value of merchandise ordered at wholesale, even when she gets certain products from MK for free. She then collects the sales tax from her customers as reimbursement. Presumably MK set it up this way so their "Independent Consultants" don't have to worry with the paperwork of sending sales tax in to the State. Still simple enough, but there are some situations where it gets complicated.

If she discounts items, takes them from inventory for personal use, uses them for product demonstration, or discards them because they are out-of-date or obsolete, she doesn't collect a full tax reimbursement for those items. She can fill out a form with MK to get that back, but it may not (and did not for 2008) occur within the same tax year. That reimbursement from MK would then be reported on 1099-MISC.

I'm not certain where on schedule C to account for the sales tax, and trying to future-proof our method of accounting has me running in circles in my head.

At first I expected to include sales tax directly in product cost: purchases, receipts, and inventory - she can't order product without paying sales tax up front, so that made sense. But what if the tax rate changes when she still has inventory paid for under the old rate? Tallying the cost of inventory at the end of that year will be a nightmare. What if the wholesale cost of an item changes? Again, figuring tax into the cost at end of year inventory would then be messy. Every single item would need to be tracked individually, instead of just saying "I have N quantity of item X".

So I'd rather keep sales tax separate from product inventory value/cost. One worksheet I've seen online specifically detailing things to track/tally for MK business completely ignores sales tax other than uncollected sales tax described above. It even specially instructed to exclude sales tax collected on receipts. Again, that seems fine so long as the tax rate never changes, because if the tax rate applied to all lines is the same, it's a zero sum.

It seems to me that the correct way is to report collected sales tax in gross receipts, MK tax reimbursement in the lines designated for 1099-MISC income, and sales tax paid to MK at the time of purchase as a Schedule C line item tax expense (but not in any cost of goods sold calculation). This precisely captures the sales tax paid and collected in a given year, while keeping it separate from the valuation of inventory cost.

Does this sound like the correct way to proceed? I usually do my taxes in the first weeks of February, but trying to figure this out has delayed my filing until now.

Last edited by fcf1220 : 04-04-2009 at 04:42 PM.

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