Could a retailer use accrual accounting generally but report Texas sales tax on credit sales using the cash basis?

Plain-English summary

A retailer used accrual accounting for federal and financial-reporting purposes but wanted to remit Texas sales tax on credit sales only as customer payments were collected.

Under Rule 3.302, the retailer could use the cash basis for sales-tax reporting while keeping accrual accounting for other purposes, provided sales tax was reported consistently. The change applied only prospectively: no credit was allowed for tax remitted before the conversion, and the cash method could not be used to delay tax on the retailer's own taxable purchases.

The retailer also had to distinguish collections on pre-conversion sales, for which tax had already been paid, from collections on post-conversion sales. Its records needed to trace reported amounts to invoices, certificates, shipping documents, and other source records. An audit shortfall could produce tax, penalty, and interest, and interest charged on sales tax might require a separate return under Rule 3.302(f).

What this means for you

Using one accounting method for financial books and another for Texas sales-tax reporting was permitted here, but only with consistent reporting and a detailed audit trail through the transition.

Common questions

Could the retailer switch sales-tax reporting from accrual to cash basis? Yes, prospectively.

Could it recover tax already remitted before the switch? No.

Did the method apply to the retailer's taxable purchases? No.

What records were required? Records detailed enough to verify gross and taxable sales and trace reported collections to individual source documents.

Citations and references

• Comptroller Rule 3.302 — Accounting Methods, Credit Sales, Bad Debt Deductions, Repossessions, Interest on Sales Tax, and Trade-ins
• Rule 3.302(f) — interest charged on sales tax

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9010L1049C07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

BOB BULLOCK
Comptroller

October 10, 1990

Dear ** :

Thank you for your recent letter regarding procedures for reporting
Texas sales tax.

A substantial percentage of your sales volume is generated by credit
sales. A cash flow burden is placed on your business because you
must pay substantial funds in sales tax remittances prior to the ac-
tual collection of such funds. In order to comply with Federal Tax
Regulations and Generally Accepted Accounting Procedures, the accru-
al basis is used for accounting and financial reporting. You request
permission to report and remit Texas sales tax on credit sales as the
monies from such transactions are collected.

Your inquiry referenced Rule 3.302 - Accounting Methods, Credit Sales,
Bad Debt Deductions, Repossessions, Interest on Sales Tax, and Trade-
ins. This rule states that a retailer may use a cash basis, an accru-
al basis, or any generally recognized accounting basis which correct-
ly reflects the operation of their business for sales and use tax pur-
poses. A retailer may use the cash basis for sales tax reporting pur-
poses even though the accrual basis is used for accounting purposes.
This is allowed as long as the tax is reported in a consistent manner.

The change from the accrual basis to the cash basis for reporting the
sales and use tax is prospective only. Credit will not be allowed for
tax remitted prior to the change in reporting procedures. I should al-
so mention that this procedure cannot apply to remitting tax on taxable
purchases (items purchased for your own use).

The use of the cash basis for sales tax reporting purposes and the ac-
crual basis for accounting purposes will entail additional record
keeping. Initially, collections from customers will include those
sales on which the tax has already been remitted to the State (tax-
paid sales made prior to the conversion) and sales on which the tax
has not been remitted to the State (tax-due sales made after the Con-
version). You will need to establish a procedure to correctly account
for sales tax on collections from customers during the transition pe-
riod. If an audit should determine that the sales tax has not been
properly reported and paid, you would be liable for the tax plus ap-
plicable penalty and interest.

Furthermore, sales records must be maintained that reflect the results
of business from cash receipts. The records using the cash basis must
be of detail to allow for the verification of gross and taxable sales.
In the event of an audit or other verification of amounts reported
using the cash basis, reported amounts must be traceable to individual
source documents, i.e., sales invoices, resale and exemption certifi-
cates, shipping documents, etc. In other words, there must be a trail
between amounts reported using the cash basis and the individual trans-
actions making up the reported amounts.

Finally, the change from the accrual basis to the cash basis for sales
tax reporting purposes may make it necessary for you to report interest
charged on sales tax. Please refer to section (f) of Rule 3.302. This
additional amount is be reported and remitted on a separate return but
will cover the same reporting period as the current sales tax return
being filed. Please advise if you will have interest to remit to the
State so that the necessary forms can be sent to you.

This opinion is based on the facts presented. If there are additional
or different facts, the opinion may change.

If you have any questions or need more information, please call our
toll-free number 1-800-252-5555, extension 34666. The regular number
is 512/463-4600. You may also write to Tax Correspondence, Comptroller
of Public Accounts.

Sincerely,
Jo Ann Dieck
Tax Correspondence