USA JE for state of Hawaii GET tax

[FooserX]

Aloha!

I am in a weird situation, but it seems simple.

I have just started working for a company that is mixing accrual and cash based accounting. It’s causing an issue specifically for paying an excise tax.

the system auto accrual journal upon issuing an invoice is:

Septmber

Dr AR 200
Cr Sales 180
Cr GE Tax payable liability 20

(I feel like the get expense needs to be in the entry as that is when the tax expense is incurred.)

Then, the following month, the business pays the State. The entry from the bookkeepers is:

Dr GE tax expense 20
Cr Cash 20

Because the bookkeepers Are not in sync with the accrual sideof this, the result is an accumulation of the GE tax liability account ($90k this year). The entry should be clearing out the liability.

From an expense perspective, the GE paid is correct. The $20 expense is accurately reflected on the income statement, and cash is accurately decreased each month. However, I’m left with the $20 liability.

Any ideas on the proper journal entries for this process? It’s different than sales tax in that this is an expense on the income statement.

Tia!
Scott

 

[HowToAccount]

Hi,

I ran into a similar issue with the GET taxes and it's important to note the following:

In Hawaii, the GET tax will be charged to your business based on the county you're in. In that sense, it is a business tax. Theoretically, you could completely omit the GET tax from all of your invoices and just pay the GET tax. However, the state of Hawaii allows you to pass this tax on to the customer (see https://tax.hawaii.gov/geninfo/get/). From that web address:

From that perspective your company is making a smart move. Pass this tax on to the customer so you don't incur any expense. There are two ways to do this and that being said, your first entry is 100% correct. You're hitting the AR for the total the customer owes, recording the revenue for the sale, and recording the GET tax liability. You get an A+ for this.

Dr AR 200
Cr Sales 180
Cr GE Tax payable liability 20

However, your second entry is not right. If you're passing this tax on to the customer (and you are) then your entry should look like this:

Dr GE Tax payable liability 20
Cr Cash 20

This will avoid any accrual building up and should take that GET tax off of the income statement where it probably doesn't belong. The reason I say probably is because of this next explanation.

The alternative to this, if you are indeed passing this on to the customer (and you are) is to record the GET tax revenue and the GET tax expense (which would net to zero overall). This would put that GET tax expense on your books for 20 dollars and the revenue on the books for 20 dollars. But, if you're like me, this seems nonsensical because it just inflates revenue and expenses only to net to zero (or very near zero). It seems much more logical to run it all through an accrual account and then reconcile it at the end of each quarter to true up the amount you pay to the state. If there are any reconciliation discrepancies then that's when you'd have an expense from under charging the pass through tax but it should be small.

In conclusion: just change that debit on your second entry to the payable account. At the end of the year just reconcile that account and if you paid too much or too little to the state, contact them.