If a company purchases goods and services for its operations, and if the company pays sales taxes on those goods and services, are the taxes an actual expense to the business? The answer: It depends.

In Canada, once a business grosses its first $30,000 in total revenue, it is legally compelled to register for a GST (General Sales Tax) account and to start charging and collecting GST for its services and then remitting those taxes to the government.

So why isn’t it an expense?

GST may or may not be an expense, depending upon the combination of GST that is payable to the government and GST credits that are accrued by a company based on its own purchases for the business.

After a company registers for GST, the company must charge and collect an extra 5% on all products and services. Then on either a monthly, quarterly or annual basis, that GST must be remitted to the government. GST collected from customers is recorded on the balance sheet as a liability called “sales taxes payable”.

In addition, every time a company buys something for the business and is itself charged GST, it builds up GST credits. GST credits from business expenses are recorded on the balance sheet as an asset called “sales taxes receivable”.

At the end of the month, year or quarter (depending on when the company files its taxes), it’s possible to determine if GST — and other sales taxes, if applicable — are an expense by subtracting Sales Taxes Receivable from Sales Taxes Payable.

If the difference between the two numbers is a positive number then the company owes the government money and the amount is recorded on the income statement as an expense. If the number is a negative one, then the government owes the company money, and the amount is recorded as a credit.

So what does it all mean?

The reality is that GST expenses and credits are funded by a company charging and collecting GST on the government’s behalf. The only legal entity that actually pays GST with its own money are individual citizens.

If a company owes the government GST, that GST has been funded by charging other companies GST, so the collecting company is merely a collection agent for the government. It doesn’t have to fund GST contributions out of pocket.

Likewise, GST credits are accrued by having paid GST and can be applied against any GST owing to the government, proportionately reducing the GST that’s payable to the government. Basically, it’s a wash.

The only way that GST becomes an actual out of pocket expense for a company is if the company is paying GST, but not recording the GST payments on its balance sheet, and in turn not collecting GST from its own customers.

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