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To arrive at taxable revenue, when do I make the deduction for credit card fees paid, before or after backing sales tax out of the original sale?

To arrive at taxable revenue, when do I make the deduction for credit card fees paid, before or after backing sales tax out of the original sale? To simply my question, assume one sale transaction with the following info: Sale $100 (includes 10% sales tax); Credit card fee of $3 (3% of sales). As I pay the fee based off total sales, I want to ensure that the full $3 paid is actually deducted. Deducting $3 paid from the $100 sale before backing out sales tax proves a higher taxable income, ($100-$3=$97/1.10=$88.18); while deducting the fee after backing out sales tax proves a lower taxable income, ($100/1.10=$90.91 - $3 = $87.91). Which way is the correct method?

Answers

Ken Stumder
Title: Finance Director / Controller
Company: Ken Stumder, CPA
(Finance Director / Controller, Ken Stumder, CPA) |

Dear Anonymous,

I'm not 100% clear on the question, but sales tax is not supposed to be included in sales. You are just a collection agent for the state. That part of the transaction sits on the balance sheet (A/R and Sales Tax Payable).

If you incur higher merchant fees as a result of charging taxes, that is still just a cost of doing business. I believe you need to start by fixing the way the sales are recorded / reported.

Anonymous
(CPA, EA) |

Thank you for your response Ken, I appreciate your answer greatly and agree. However, I was trying to mold my question in a way to get a thought down on how taxable revenue should be reported to a certain state taxing authority. This taxing authority allows sales tax to be included in the price of…lets say a concert ticket… and subsequently allows the included sales tax to be backed out before reporting revenue to said authority on the sale of the ticket (collection agent for state). In addition, credit card fees paid on the sale price of the ticket are allowed to be excluded from taxable revenue.
This taxing authority is only concerned with revenue generated from the sale of the ticket and their allowable exclusions/deductions. They want revenue to be reported to them using the first method seen in the question, by deducting $3 fee from sale of $100, then backing out sales tax. I feel this method doesn’t actually allow the full weight of the fee to be deducted. Hope this makes sense, and thank you again for your response.

Cyril Erugo
Title: CGFM, EA
Company: ST&A
(CGFM, EA, ST&A) |

The sales tax should not be included in gross sales and it is not part of COGS. As Ken indicated you are just a collection agent for the state. Based on your example, your taxable revenue should be $90 (total sales of $100 minus the 10% credit card fee) assuming that you did not incur any other cost.

Cyril Erugo
Title: CGFM, EA
Company: ST&A
(CGFM, EA, ST&A) |

Sorry I just realized that the credit card fee is 3%. So your taxable should be $97 (100 - 3).

Anonymous
(CPA, EA) |

Thanks for your response Cyril.

Correct. The sale should not include the sales tax. With that being said, are you saying that reportable sales should be calculated by $100/1.10=$90.91 less the $3 fee (based off of the $100 * 3%) to arrive at $87.91 or $100 - $3=$97 / 1.10 = $88.18. It makes a small but material difference in large quantities when the fee is deducted prior to backing out sales tax (the way this taxing authority wants it done)

Thank you again for your response.

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