I pay sales tax for my customers - can I deduct it as a business expense?

This is an interesting situation! While I can't give you professional tax advice, I can share some general information about how sales tax typically works from a tax perspective. When you include sales tax in your pricing without separately stating it, you're essentially treating it as part of your gross receipts. However, that doesn't change the nature of what the sales tax is - it's still a tax imposed on the sale that you're required to collect and remit to the state. The IRS generally doesn't allow you to deduct sales taxes that you collect from customers (or should be collecting) and remit to the state. These are considered "trust fund taxes" because you're collecting them on behalf of the taxing authority. Even if you choose to absorb the cost rather than separately charging customers, it's still technically a sales tax, not a business expense. The correct approach would be to back out the sales tax from your gross receipts rather than deducting it as a business expense. For example, if your state has a 7% sales tax and you had $10,000 in sales (tax inclusive), you would report approximately $9,346 as your gross receipts ($10,000 ÷ 1.07) and remit $654 in sales tax.

I had a similar issue with my online shop last year. After spending hours trying to figure out sales tax on my own, I discovered this AI tool called taxr.ai (https://taxr.ai) that helped clear things up. You upload your sales records and it analyzes whether you're handling sales tax correctly for your business structure. In my case, it flagged that I was doing exactly what you're doing - absorbing sales tax instead of collecting it - and explained the proper way to account for it. The tool highlighted which portion of my gross receipts was actually sales tax that needed to be backed out rather than deducted as an expense. Saved me from a potential audit headache and helped me understand how to properly structure my pricing going forward.

I was really skeptical about using https://taxr.ai at first (like I mentioned above), but after my accountant raised some red flags about how I was handling sales tax in my woodworking business, I decided to give it a try. The analysis spotted several issues I had no idea about - I was backing out sales tax incorrectly from my gross receipts and treating some interstate sales wrong. It generated a report that showed exactly how to correct my previous filings and set up my accounting correctly going forward. My CPA was impressed with how comprehensive the analysis was. The best part was that it identified when I should be collecting sales tax vs. when I shouldn't based on economic nexus rules across different states where my customers are located. Definitely worth checking out if you're confused about sales tax like I was.

Anyone else struggling to even get through to their state's department of revenue with questions about sales tax? I tried calling the California tax board literally 15 times about a similar sales tax issue and kept getting disconnected or stuck on hold forever. Finally tried Claimyr (https://claimyr.com) which got me through to an actual human at the tax office in under 10 minutes. They have this system that navigates through all the phone menus and waits on hold for you, then calls you when they get a live person. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The tax agent I spoke with confirmed what others are saying here - you can't deduct sales tax as a business expense even if you're paying it yourself, but you should adjust your gross receipts to back out the sales tax component. Saved me hours of frustration trying to get through on my own.

OK I'm eating crow here... After being skeptical about Claimyr I decided to try it since I was desperate to talk to someone at the NY State Department of Taxation about sales tax filing deadlines. I was honestly shocked when I got a call back in about 15 minutes saying they had a tax representative on the line. I ended up getting my questions answered about both filing deadlines AND the sales tax absorption issue the original poster mentioned. For what it's worth, the NY tax rep told me the same thing - when you absorb sales tax instead of separately collecting it, you need to back-calculate it from your gross sales rather than deducting it as a business expense. She also mentioned this is a common mistake that can trigger notices or audits if done incorrectly. Super glad I didn't have to spend my entire afternoon on hold to get this info!

I've been running my jewelry business for 6 years and learned this lesson the hard way. When I started, I wanted to advertise "tax-inclusive" prices to make it simpler for customers. My first year, I tried deducting the sales tax I paid as a business expense and got a notice from the IRS. The correct way to handle this is: 1) Calculate your total sales (tax inclusive) 2) Divide by (1 + your tax rate) to find your actual sales revenue 3) The difference is the sales tax you remit to the state 4) Only report the actual sales revenue on your Schedule C Example: If you sold $10,700 of products with 7% tax included: $10,700 ÷ 1.07 = $10,000 actual sales $700 = sales tax to remit Report $10,000 as your gross receipts, not $10,700 This isn't the same as deducting it - you're just not counting the tax portion as income in the first place.

I think people are overcomplicating this. I've run my business for 10 years and have always included tax in my pricing. As long as you're consistent in how you track everything, it's not that complicated. Just make sure your POS or bookkeeping system allows you to record sales tax separately, even if your customers don't see it broken out. Most modern systems can handle tax-inclusive pricing while still tracking the tax component for you.

Slightly different perspective here - have you considered just separating out the sales tax on your invoices/receipts instead of absorbing it? There are a few benefits: 1. Customers actually expect to see sales tax added separately 2. It's WAY easier for accounting/bookkeeping 3. You don't cut into your profit margins 4. Avoids all this tax deduction confusion When I switched from inclusive to exclusive pricing, my sales didn't drop at all - turns out customers are used to seeing the tax added at checkout. Just something to consider as a simpler solution to your problem.

I've been dealing with this exact same issue in my small business! After reading through all these responses, I'm convinced that backing out the sales tax from gross receipts is definitely the right approach rather than trying to deduct it as an expense. One thing I'd add is to make sure you're also considering multi-state sales tax rules if you sell online. I got caught off guard when I started selling to customers in other states and didn't realize I had economic nexus obligations in some of them. Each state has different thresholds for when you need to start collecting and remitting sales tax. Also, if you're doing craft shows or farmer's markets across state lines, you might need temporary sales tax permits in those states. I learned this the hard way when a show organizer informed me I needed to collect local sales tax for that jurisdiction. The good news is once you get your system set up correctly to separate the tax component from your actual sales revenue, quarterly filings become much more straightforward. I use a simple spreadsheet that automatically calculates the breakdown, and it's saved me so much headache compared to when I was trying to figure out deductions.