Accruing Use Tax

Many contractors purchase materials under a retail sales tax certificate. It’s presented to your suppliers, and the supplier does not charge sales tax. It’s your company’s responsibility to pay the Use Tax on the materials. Great for cash flow, but lots to consider here.

This is when I usually hear that quite a bit of your work is for tax-exempt work. Your purchases are only exempt from sales tax if they go ‘in the wall.’ So wood, nails, mortar, steel, rebar, caulk, etc.  But that caulk gun does not go ‘in the wall’ so you owe sales tax on it. You also owe tax for things like safety equipment, consumables such as masks, and all things you can charge to the job, but are not exempt. Bottom line: even on a tax-exempt job, you will owe sales tax on various items.

Whether it’s non-exempt items, or a taxable job, how to handle these costs, and where to charge them?

This is where the fun starts for the bookkeeping team. We have some great workflows to accrue for these taxes, charge them to the right job without extra month-end compilations, and have the numbers you need to report the total sales that are subject to the tax, as well as the tax itself to the state.

We recommend setting up a few Parts for the Use tax or tax districts you need to report on. A reminder that this is very different than charging customers Sales tax (a different part of the program). Then in the AP entry screen, using the new part numbers, in the Quantity field, enter the dollar amount subject to tax (be sure to exclude freight and similar), in the Price field, you enter the tax rate (as a decimal), and use a direct expense account. You don’t want to pay it to the vendor, so on the next row, use the same part number, enter the amount subject to tax as a negative, the same rate, and on this row, use a Liability account number.

On the job cost screen, you’ll have the total materials AND the cost of the sales tax. You can enter the tax as a separate cost code or lump in with the materials; check with the estimators to see where they have these costs. At the end of the month, run a query on the part number(s) and you’ll have the total amount subject to use tax, and the money set aside in the liability account. The job costs are right all along! – CMW