US sales tax on purchases
If I record sales tax paid on purchases in the US, Xero reports that as a negative liability on the balance sheet. It should either be reported on the P&L or the line item it applies to should be grossed up on the P&L.
Camille Goulet
shared this idea
Hi Camille, thanks for sharing this idea and the context behind it.
We can see how having a dedicated way to track US sales tax on purchases could make it easier to manage reporting, reconcile costs, and maintain visibility of tax paid to suppliers.
I've updated the status of this idea to Gaining Support, so if this is something you'd like to see in Xero, please keep on voting and sharing how this would support your workflow.
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Stuart Adkins
commented
Absolutely agree with OP and commenter Austin. It actually seems insane to me that Xero does not have this figured out for US Customers despite being one of the top accounting products in the United States. Effectively, because of the miscategorization of the sales tax, the balance sheet is completely incorrect straight out of Xero. It completely misrepresents the actual value of the sales tax account from a liability account perspective and therefore skews the entire balance sheet. How many users have absolutely no idea and are misrepresenting their financial position as a result? I know Xero really doesn't care as long as the monthly subscription money keeps rolling in, but gosh is it frustrating.
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Austin Smith
commented
In the United States, sales tax paid on business purchases (such as office supplies, tools, or equipment) is generally considered part of the expense. This means the total amount paid—including sales tax—should be recorded as an expense in the relevant account. Sales tax collected from customers, on the other hand, is a liability and should be tracked separately as “Sales Tax Payable” until remitted to the state.
The Issue in Xero (US Version): When entering a spend money transaction or expense in Xero and applying a sales tax rate (e.g., Texas 8.25%), Xero automatically splits the transaction:
The net amount (before tax) is posted to the expense account.
The sales tax portion is posted to the Sales Tax Liability account.
This approach is problematic for US businesses because:It does not align with standard US accounting practices, where sales tax paid on most business purchases is not tracked as a liability but is included in the expense.
It can result in an overstated sales tax liability and understated expenses, leading to inaccurate financial statements and potential confusion during tax preparation or audits.
The only workaround is to enter the total (including tax) as the line amount and select “No Tax” as the tax rate, which is not intuitive and can be error-prone for users expecting the software to handle US tax logic automatically.
Why This Matters:US businesses need accurate expense reporting for tax deductions and compliance.
Incorrectly tracking sales tax paid as a liability can cause reconciliation issues and misrepresent the true financial position of the business.
This behavior is especially confusing for users familiar with US accounting standards, as it differs from how most US accounting software handles expense tax.
What’s Needed:Xero should provide an option or default behavior for US users to include sales tax paid on expenses as part of the expense account, not as a liability, unless the business is eligible for a sales tax refund or credit.
Improved guidance and workflow for US-based businesses to ensure compliance with local accounting standards.