Sales Tax (As Cost of Goods)

Treated as part of cost

Sales tax paid on a business purchase is treated as part of the cost of the item, not separately deductible as a tax. A $1,000 computer with $80 sales tax has a cost basis of $1,080 — the entire amount goes to whichever expense or asset line the underlying purchase belongs.

Sales tax you collect

Sales tax that you collect from customers on behalf of the state is not your income — it is a liability you owe the state. When you remit it to the state, it is not your deduction. Most modern point-of-sale and accounting systems handle this correctly without manual intervention.

State and local income taxes

State and local income taxes (including franchise taxes paid by an LLC or S-corp) are NOT sales taxes. State business income taxes paid by a sole proprietor are deductible on Schedule A (subject to the $10,000 SALT cap). Some states permit a "pass-through entity tax" election that lets the entity deduct state taxes federally and credit them to owners — investigate your state's rules.

Sales tax audits

States actively audit sales tax. Maintain detailed records of taxable vs exempt sales, resale certificates from buyers, and use tax accruals on out-of-state purchases. Failure to collect sales tax when required exposes the business to back taxes plus interest plus penalties — owners may be personally liable.

Wayfair nexus

Since Wayfair (2018), economic nexus rules require remote sellers to collect sales tax in any state where they exceed an annual sales threshold (often $100,000 in sales or 200 transactions). E-commerce sellers must monitor exposure across many states.

Worked example with numbers

Consider a sole prop with $100,000 in gross receipts and $30,000 in legitimate Schedule C deductions, including this category. Each additional $1,000 of qualifying expense reduces Schedule C net profit by $1,000, which reduces self-employment tax by approximately $1,000 × 92.35% × 15.3% ≈ $141, and reduces income tax by $1,000 × marginal rate. At a 22% federal marginal rate, the combined federal tax savings on each additional $1,000 of legitimate deduction is roughly $361, and state savings sit on top of that. The math is why disciplined categorization throughout the year pays for itself.