Can a Texas retailer switch from accrual to cash-basis reporting of sales tax, and how does that affect installment/credit sales where interest is charged on the tax portion of the balance?

Plain-English summary

A retailer wrote to the Comptroller's office asking for permission to switch its sales tax reporting from the accrual method to the cash method — that is, remitting sales tax as payments are actually received from customers rather than at the time of sale. The Comptroller confirmed that this switch is permissible, but flagged two important conditions.

First, the change cannot be made retroactively. Because the retailer would have both "tax-paid sales" (sales made before the conversion, on which tax was already reported under accrual accounting) and "tax-due sales" (sales made after the conversion), it needs a procedure to correctly track which payments received during the transition period relate to which category of sale. If an audit later finds that sales tax wasn't properly reported and paid during that transition, the retailer would be liable for the tax plus penalty and interest.

Second, switching to cash-basis accounting can trigger a separate obligation under Subsection (b) of Rule 3.302, which governs credit sales. Retailers who make installment sales of taxable items, roll the sales tax due into the customer's outstanding balance, and charge interest on that outstanding balance must send the state a portion of the interest collected on the sales-tax portion of the installment sales — in addition to the regular sales tax otherwise due. That extra amount is reported and remitted on a separate return, filed for the same period as the retailer's regular sales tax returns.

What this means for you

Retailers considering a switch to cash-basis sales tax reporting

You can request to move from accrual to cash-basis reporting, but plan for a clean transition: you cannot apply the change retroactively, and you need a system to correctly distinguish tax-paid sales (pre-conversion) from tax-due sales (post-conversion) as customer payments come in. Get this wrong and an audit can leave you liable for unpaid tax, penalty, and interest.

Retailers with installment or credit sales

If you finance sales by including the sales tax in the customer's balance and charging interest on that balance, moving to cash-basis accounting doesn't get you out of Rule 3.302(b)'s separate interest-remittance requirement. You still owe the state a portion of the interest collected on the sales-tax portion of those installment payments, reported on a separate return for the same period as your regular sales tax return.

Accountants and tax professionals

This letter is a useful short reference on two distinct but related issues: (1) the mechanics and audit risk of switching accounting methods for sales tax purposes, and (2) the ongoing, separate interest-remittance obligation under Rule 3.302(b) for retailers financing sales tax through installment/credit arrangements — an obligation that persists regardless of which accounting method the retailer uses.

Common questions

Q: Can a retailer switch from accrual to cash-basis sales tax reporting?
A: Yes, this is permissible, but the change cannot be made retroactively, and the retailer must set up a proper procedure to account for tax-paid versus tax-due sales during the transition.

Q: What happens if sales tax isn't properly tracked during the switch?
A: If an audit determines that sales tax was not properly reported and paid, the retailer is liable for the tax, plus applicable penalty and interest.

Q: Does switching to cash-basis accounting affect installment sales where interest is charged?
A: Yes. Under Subsection (b) of Rule 3.302, retailers who make installment sales, include sales tax in the outstanding balance, and charge interest on that balance must remit to the state a portion of the interest collected on the sales-tax portion of those sales, in addition to the regular sales tax due, reported on a separate return for the same filing period.

Citations and references

• 34 Tex. Admin. Code Rule 3.302(b) (credit sales; interest on the sales-tax portion of installment sales)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9412L1330E03

Original ruling text

December 19, 1994

Dear **:

Thank you for your letter dated December 16, 1994, requesting permission to
file sales tax reports on a cash method of accounting.

It is permissible for you to change from an accrual to a cash basis of
accounting (remitting tax as payments are received) for sales tax purposes;
however, this change cannot be made retroactively. Since you may have tax-paid
sales (sales prior to conversion) and tax-due sales (sales made after the
conversion) a procedure must be established to correctly account for sales tax
on remittances from customers during the transition period. If an audit should
determine that the sales tax has not been properly reported and paid, you would
be liable for the tax, plus applicable penalty and interest.

In changing to a cash basis of accounting, you may be affected by Subsection
(b) of Rule 3.302 regarding credit sales. Retailers who make installment sales
of taxable items, include the amount of sales tax due in the outstanding
balance, and charge interest on the outstanding balance are required to send a
portion of the interest collected on the sales tax portion of installment sales
to the state in addition to the regular sales tax due the state. This
additional amount is to be reported and remitted on a separate return, but for
the same reporting period as the retailer is currently filing sales tax
returns.

Please advise if you will have interest to remit to the state so that the
reporting form can be sent.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0330. The direct line is
512/475-0330. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9412822L