How to setup an excise tax

Certain states such as Hawaii and New Mexico charge an excise tax or gross receipts tax instead of a sales tax. While they might sound similar on the surface they are actually quite a bit different.

A sales tax is a tax imposed on consumers who purchase goods at retail. Sellers are required to charge and collect sales taxes from consumers, usually a percentage of the retail sales price of an item, and pay the sales tax collected to the state or locality imposing the tax on behalf of the consumer. If a seller fails to collect the sales tax from the buyer, then that seller must pay the tax out of his or her own pocket. The bottom line, however, is that a sales tax is a tax which is imposed on customers, and which retailers are required to collect for the state or locality.

The general excise tax, on the other hand, is a tax levied on gross income (i.e., total business income before any business expenses are deducted) derived from any business activity. It is important to note that the excise tax is imposed on the business instead of on the customer. Rather than merely acting as tax collectors, businesses are themselves taxed on their income. The excise tax, therefore, is considered to be an expense which businesses incur in the normal course of doing business, similar to other expenses such as labor costs, utility bills, supplies, cost of inventory, and the like.

Details:

ESC supports the following ways of handling excise taxes:

Scenario 1 - Excise tax passed on to customer

Enter a sales tax code for the amount of the excise tax and apply it to the invoice. This works perfectly with both QuickBooks and Peachtree and is the simplest, best way to handle this.

Scenario 2 - Excise tax not passed on to the customer

Follow the directions in scenario 1 to determine the amount of the excise tax. Add an Excise billing code to the invoice with a quantity of 1, a price of $0.00 and a cost that equals the excise tax. Then change the tax code to exempt (or another tax code that has a zero percentage).

This method will put the tax amount owed in the appropriate account. However, it will bypass the Pay Sales Tax Feature in QuickBooks and the Taxable/Exempt Sales report in Peachtree. This will require you to manually write a check in either program to pay your taxes.

Setting Up A Tax Code (required for both scenarios)

Excise taxes are calculated on the total amount of the invoice not the pre-tax total. So you can't just enter the excise tax percentage in the sale tax code and arrive at the total you will have to pay. For example: if you have a $100.00 invoice and an excise tax of 4%, you can't simply add them together. Doing so will result in a total of $104.00. The excise tax will be applied to that amount, not the $100.00, so the total tax you would be liable for is $4.16.

In order to recoup all of your taxes from the customer you must increase the amount of the excise tax. The following formula shows you how to figure out the correct percentage to charge.

PreTaxTotal + (PreTaxTotal * Excise%) = Total

Total * Excise% = ActualTax

ActualTax / PreTaxTotal = SaleTax%

Example: The state of Hawaii has a 4% excise tax. To calculate the sales tax percentage assume you have an invoice that is $100.00 before tax. So we take the PreTaxTotal ($100.00) and multiply it by the Excise% (4%) to get $4.00 in tax. We add the PreTaxTotal ($100.00) with the tax amount ($4.00) to arrive at the Total ($104.00). Next we multiply the Total ($104.00) by the Excise tax percentage (4%) to come up with the ActualTax ($4.16). Finally we divide the ActualTax ($4.16) by the PreTaxTotal ($100.00) to arrive at our SalesTax% (.0416).

Set the Sales Tax Code up as a retail tax using this percentage.

Setting Up An Excise Billing Code (required for Scenario 2)

Create a billing code called Excise with a type of Other. Set the price to $0.00, the Cost Debit to some Cost of Sales account and the Cost Credit to a Excise Tax Payable account (generally a liability account). Leave the rest of the settings at their default values.