6.7 Sales Taxes and Similar Taxes Collected From Customers
ASC 606-10
32-2A An entity may make an accounting policy election to exclude from the measurement of the transaction
price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific
revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value
added, and some excise taxes). Taxes assessed on an entity’s total gross receipts or imposed during the
inventory procurement process shall be excluded from the scope of the election. An entity that makes this
election shall exclude from the transaction price all taxes in the scope of the election and shall comply with
the applicable accounting policy guidance, including the disclosure requirements in paragraphs 235-10-50-1
through 50-6.
Stakeholders have questioned whether sales taxes and similar taxes (“sales
taxes”) should be excluded from the transaction price when such taxes are collected
on behalf of tax authorities.
Further, the revenue standard’s guidance on assessing whether an entity is a
principal or an agent in a transaction is relevant to the assessment of whether
sales taxes should be presented on a gross or net basis within revenue (see Chapter 10 for further discussion
of the assessment of whether an entity is a principal or an agent). The analysis is
further complicated by the sales tax in each tax jurisdiction (which would include
all taxation levels in both domestic and foreign governmental jurisdictions),
especially for entities that operate in a significant number of jurisdictions.
The FASB decided to provide in ASU 2016-12 a practical expedient
(codified in ASC 606-10-32-2A) that permits entities to exclude from the transaction
price all sales taxes that are assessed by a governmental authority and that are
“imposed on and concurrent with a specific revenue-producing transaction and
collected by the entity from a customer (for example, sales, use, value added, and
some excise taxes).” However, such an accounting policy election does not apply to
taxes assessed on “an entity’s total gross receipts or imposed during the inventory
procurement process.” An entity that elects to exclude sales taxes is required to
provide the accounting policy disclosures in ASC 235-10-50-1 through 50-6.
An entity that does not elect to present all sales taxes on a net basis would be
required to determine, for every tax jurisdiction, whether it is a principal or an
agent in the sales tax transaction and would present sales taxes on a gross basis if
it is a principal in the jurisdiction and on a net basis if it is an agent. Making
this determination requires an understanding of which entity (the customer or the
vendor) has incurred the tax obligation (i.e., identification of the party on which
the taxes are assessed). In some jurisdictions, it may be clear that the taxes are
assessed on the customer. Therefore, the vendor might be acting as an agent and
collecting and remitting taxes on behalf of the customer or the government. The
vendor might have the obligation to remit taxes (i.e., have a sales tax liability
for amounts collected, or for amounts whose collection was required); however, a
remittance obligation by itself does not mean that the vendor is primarily
responsible for the taxes. By contrast, in other jurisdictions, sales taxes (or
similar taxes) may be assessed on and payable by the vendor regardless of whether
the taxes are included in the amounts collected from customers. In these instances,
the vendor may be the entity that legally incurred the taxes and is obligated to pay
the government (i.e., the vendor may be primarily responsible for paying the taxes).
Therefore, the vendor would be the principal in the tax transaction and would
present the taxes on a gross basis as revenue.