Gross sales and sales tax are separate line items on your business records
Gross sales is the total dollar amount your business receives from customers before you subtract anything — before refunds, discounts, or the sales tax you collected. Sales tax is money you collected on behalf of the state or local government, not money your business earned. When you report gross sales to a tax authority or on your own accounting records, you do not include the sales tax amount in that figure.
The distinction matters because sales tax is a pass-through: you collected it, but it belongs to the government. Your business income — what you actually keep and what determines your tax liability — is the gross sales amount alone. If a customer paid you $107.50 for a $100 item plus $7.50 in sales tax, your gross sales are $100, not $107.50.
Key Takeaways
- Gross sales are the revenue your business earned before any deductions; sales tax collected is not part of that number.
- Sales tax is money held in trust for the government and reported separately on your tax filings and accounting records.
- The difference between gross sales and gross revenue (which includes sales tax) matters when you file income tax returns and sales tax returns.
- Your accounting system should track sales tax as a liability account, not as business income.
How gross sales and sales tax appear on your records
When you ring up a sale, your point-of-sale system or accounting software typically records two things: the sale amount and the tax collected. The sale amount is your gross sales. The tax collected is recorded as a liability — money you owe to the state or local tax authority, not money you earned.
On your income statement or profit-and-loss report, gross sales appear as revenue. Sales tax does not. Instead, sales tax shows up on your balance sheet as a current liability until you remit it to the tax authority. This separation is not optional accounting preference — it is how tax authorities and accountants expect the records to be organized.
If you use accounting software like QuickBooks, Xero, or Wave, the system handles this automatically when you set it up correctly. When you create an invoice and mark it as taxable, the software calculates the tax, adds it to the customer's total payment, but records only the pre-tax amount as revenue.
Gross sales versus gross revenue: which one includes tax
Gross sales and gross revenue are not the same thing, and the difference hinges on sales tax. Gross sales are the amount before tax. Gross revenue is sometimes used to mean the total amount customers paid you, including tax.
The terminology varies by industry and context. Some businesses and accountants use "gross revenue" to mean the same as "gross sales" — the pre-tax amount. Others use "gross revenue" to mean the total cash received, tax included. To avoid confusion, use the term that matches your tax authority's forms and your accounting software's labels. On IRS forms and most state income tax returns, the line item is "gross sales" or "gross receipts," and it should not include sales tax.
What to report on your income tax return
On your federal income tax return (Form 1040 Schedule C for sole proprietors, or the appropriate form for your business structure), you report gross sales or gross receipts — the amount before sales tax. The IRS does not want you to include sales tax in your business income figure.
State income tax returns follow the same rule. If your state has a business income tax, you report the pre-tax sales amount. Sales tax is not your income; it is a tax you collected and must remit separately.
What to report on your sales tax return
On your sales tax return (the form you file with your state or local tax authority), you report the total sales tax you collected during the filing period. That return asks for two things: the gross sales amount (pre-tax) and the sales tax collected. The tax authority uses both numbers to verify that you charged the correct rate.
If you collected $10,000 in gross sales and $800 in sales tax during a month, your sales tax return shows both figures. You then remit the $800 to the tax authority. You do not remit the $10,000 — that is your business revenue.
Common mistakes when mixing gross sales and sales tax
The most common error is including sales tax in the gross sales figure on an income tax return. This inflates your reported income and can trigger an audit or a mismatch notice from the tax authority. If your sales tax return shows $10,000 in gross sales but your income tax return shows $10,800 (because you added the tax), the discrepancy will be flagged.
Another mistake is failing to remit sales tax because you treated it as business income and spent it. Sales tax is not your money — it is a liability from the moment you collect it. Spending it on business expenses or personal use does not change that. If you do not remit it, you owe it plus penalties and interest.
A third error occurs when businesses use cash accounting and do not separate sales tax in their records. If you deposit a customer payment that includes tax into your business account without tracking the tax portion separately, you will struggle to reconcile your records at tax time and may overstate your income.
How to set up your records correctly
If you are starting a business or fixing your records, use accounting software that handles sales tax automatically. When you create an invoice, mark line items as taxable or non-taxable, and the software calculates and segregates the tax.
If you keep manual records, create a separate column or line for sales tax on every transaction. At the end of each month or quarter, total the sales tax column and compare it to your sales tax return. The two should match.
If you accept cash and do not use a point-of-sale system, calculate the tax on each sale and write it down separately. For example, if you sell an item for $50 and the tax rate is 8%, write down $50 as the sale and $4 as the tax. Do not write $54 as the sale amount.
Frequently Asked Questions
If a customer paid me $100 including tax, what is my gross sales?
Your gross sales are less than $100. If the tax rate is 8%, the pre-tax amount is approximately $92.59, and the tax is $7.41. Your gross sales are $92.59. You owe the $7.41 to the tax authority. Your accounting records should show $92.59 as revenue and $7.41 as a sales tax liability.
Do I report gross sales before or after sales tax on my tax return?
Always before sales tax. On your income tax return, report the pre-tax amount. Sales tax is reported separately on your sales tax return to the state or local tax authority, not on your income tax return.
What if I forgot to charge sales tax on some sales?
You still owe the tax to the state, even if you did not collect it from the customer. You will need to remit it from your own funds. Going forward, make sure your point-of-sale system or invoicing process marks all taxable sales as taxable so the tax is calculated automatically.
Can I deduct sales tax I collected as a business expense?
No. Sales tax you collected is a liability, not an expense. You cannot deduct it because it was never your money to spend. If you spent it and did not remit it, you owe it to the tax authority plus penalties.
Does gross sales include sales tax if I am a reseller or wholesaler?
No. Regardless of your business type, gross sales are always the pre-tax amount. If you are a reseller, you collect sales tax from your customers and remit it to the state. Your gross sales are what you earned before that tax, not including it.