working · Lesson 5 · 11 min
Sales tax, GST, and VAT
US sales tax is a liability you collected. GST/VAT is often recoverable on purchases. Xero US leans on Avalara; QBO has a tax center.
Three systems, one idea
If you charge tax on a sale, you do not own that money. Credit a tax payable (liability). When you file and pay the return, debit the liability, credit bank. Undercharging tax understates the liability and overstates your revenue if you stuffed tax into income. Overcharging and keeping it is worse.
| Regime | On sales | On purchases | Software note (2026) |
|---|---|---|---|
| US sales tax | Charge, then remit to the state(s) | Generally not recoverable; it is part of the cost | QBO: built-in Sales Tax Center. Xero US: Avalara integration plus tax rates on invoices |
| GST (AU/NZ) / VAT (UK/EU) | Charge output tax | Claim input tax if registered | Xero was built around this. Tax rates on every line, BAS/GST return reports |
| No tax | Do not invent a rate | Do not invent a rate | Nexus, thresholds, and exempt customers still need a written position |
Connecticut example
Connecticut’s general sales tax rate in 2026 is 6.35% statewide, with no local add-on. Meals and some luxury items use higher rates. Economic nexus uses an “and” test ($100,000 and 200 transactions into the state). A landscaper charging taxable services invoices $1,000.00 + $63.50 tax. AR $1,063.50, revenue $1,000.00, sales tax payable $63.50.
Do not treat US purchase tax like VAT
In the UK, a £120 VAT-inclusive bill (20%) is expense £100, VAT recoverable £20, AP £120. In Connecticut, a $120 receipt that included $7 of sales tax is usually $120 of expense (or asset). There is no input credit on the sales-tax return for that $7. Coding it to Sales tax payable as if it were GST will underpay the state.
Check
Choices shuffle each visit. Misses send you back to the section — Look back clears the quiz so you can try again.
Answer all 2 to check.
1/2On a US sales-tax invoice, the tax amount is:
2/2US sales tax you paid on a hardware-store receipt should usually:
Practice: Invoice with sales tax