Local Sales Tax Rate Increases – Calculating and Reporting Tax for Sellers Operating on a Cash Basis of Accounting

Businesses operating on the cash basis of accounting record all transactions in their books when money actually changes hands, meaning when payment is actually received by the company or when money is paid out by the company.

If your business operates or reports using the cash basis of accounting, and there is a change in the local tax rate between the time you execute a sales contract and payment is received, you should collect tax based on the rate in effect when the sales contract was executed, unless your contract allows for a change in the contract price based on a tax rate increase. Sales contracts must be dated and state a definite price and terms.

For example, as of April 1, 2013, San Antonio increased its city sales and use tax rate by .125 percent, bringing the total state and local sales and use tax rate to 8.25 percent. For sales contracts executed before that date, a San Antonio business operating on a cash basis should collect tax based on the old rate of 8.125 percent, even if amounts due under those contracts were not paid to the business until after April 1, 2013.

The business must adjust its taxable sales figure on its sales tax report to reflect sales made at two different tax rates.

Example – A San Antonio business operating on a cash basis has $1,000 in taxable sales subject to the 8.125 percent rate and $2,000 in taxable sales subject to the 8.25 percent rate.

To calculate the adjusted taxable sales, the business would:

Total all sales subject to the 8.125 percent tax rate. $1,000
Multiply this amount by the old tax rate of 8.125 percent and divide the product by the new tax rate of 8.25 percent. $1,000 x .08125= $81.25
$81.25/ .0825= $984.85 (rounded)
Add the adjusted taxable sales made under the old rate to the taxable sales made at the new tax rate, and enter this figure in Item 2 of your sales tax return. $2,000 + $984.55= $2,984.85

 

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2013/tpn1304.html#issue6.