Are You Overpaying Sales Tax?
One of the most common issues I encounter when reviewing a company’s books is a sales tax liability account that has never been properly reconciled.
Many businesses file their sales tax returns each month but never compare the amount of sales tax collected from customers to the amount of sales tax reported on the return. Over time, this can result in overpayments, underpayments, inaccurate liability balances, and unnecessary cash flow issues.
A proper monthly sales tax reconciliation should compare three separate sources of information:
- Sales tax collected per the POS system or sales reporting software
- Sales tax payable recorded in the general ledger
- Sales tax due as calculated on the Washington Combined Excise Tax Return
Step 1: Determine Sales Tax Collected
Start with the monthly sales tax report generated by your POS system, ecommerce platform, or accounting software.
The report should identify the amount of sales tax charged to customers during the reporting period. This is the amount your system indicates was collected on behalf of the taxing authority.
Step 2: Verify the General Ledger
The amount of sales tax collected should be recorded in the Sales Tax Payable account within the general ledger.
A common control procedure is confirming that sales tax collected according to the external reporting system agrees to the activity recorded in the liability account. If those amounts differ, the issue may be related to bookkeeping entries, system integrations, or posting errors rather than the tax return itself.
Step 3: Prepare the Sales Tax Return
When preparing the Washington Combined Excise Tax Return, gross sales should be reported along with any allowable deductions, exemptions, or adjustments supported by the underlying records.
The return will calculate the sales tax due based on taxable sales and the applicable tax rate.
This amount represents the actual liability that must be remitted.
Step 4: Perform the Reconciliation
The final step is to compare:
Sales Tax Collected
Less: Sales Tax Due
Equals: Reconciliation Difference
The reconciliation difference should be investigated whenever it is material.
Positive Difference
If sales tax collected exceeds sales tax due, potential causes may include:
- Incorrect sales tax rates
- Taxability configuration issues
- Reporting errors
- Duplicate transactions
- Failure to properly apply deductions or exemptions
In general, sales tax collected from customers that is not refunded must be remitted to the state.
Negative Difference
If sales tax due exceeds sales tax collected, the business is effectively funding the shortfall from its own resources.
Common causes include:
- Undercollection of sales tax
- Incorrect tax settings
- Missing transactions
- Incomplete sales reporting
- Errors in return preparation
Why This Matters
A sales tax return can appear accurate while still containing issues originating from the source data, POS configuration, bookkeeping process, or deduction calculations.
A monthly reconciliation helps ensure that:
- Sales tax collected agrees with sales records.
- Sales tax payable agrees with the general ledger.
- Deductions and exemptions are properly reflected on the return.
- Liability account balances are accurate.
- Cash is not being unnecessarily remitted.
- Potential compliance issues are identified before they become audit findings.
In my experience, reviewing this reconciliation each month is one of the simplest and most effective internal controls a business can implement. It provides confidence that the amount collected from customers, the amount recorded in the accounting records, and the amount reported to the state all agree. When they do not, the reconciliation often identifies opportunities to improve accuracy, strengthen compliance, and preserve cash flow.