We recently received a question about whether sales tax should be included when calculating cost of goods sold. Because this is a very common scenario, we decided that this would make an interesting blog topic.
There are actually a couple of key questions here:
- When you buy items for resale, what gets included in Cost of Goods?
- If you buy multiple different items in a single transaction, how do you allocate any sales tax, shipping or other extra costs across those items?
What is included in Cost of Goods?
When you purchase items for resale, all of the direct costs you incur should be included in Cost of Goods. This can include the following:
- Sales tax
- Shipping costs (to deliver the items to you)
- Extra fees (e.g. extra charges for paying by credit card)
- Handling fees
So, if you buy an item for $100 and get charged $7.75 in sales tax, your Cost of Goods for that item should be $107.75.
How do I handle extra costs for purchases of multiple items?
The same rules apply in terms of including sales tax, shipping and other fees. However, when these extra costs apply to multiple different products, you need to allocate them based on the relative values.
Let’s take a look at an example. Imagine you have a receipt that looks something like this:
You spent $309.60 to acquire 600 items (500 of Widget 1 and 100 of Widget 2.) But the items themselves only cost $250. So what do you do with the other $59.60? Here, a little math is involved. Take the amount spent on the first item (Widget 1: $200) and divide it by the total spent on all items ($250.) Widget 1 represents 80% of your item costs. As such, Widget 1 should have 80% of the sales tax and shipping costs allocated to it. So, multiply the $59.60 in extra costs by 80%, and you’ll get $47.68 in extra costs that should apply to Widget 1. The remaining $11.92 in extra costs should be allocated to Widget 2.
The net result of these allocations gives you total Cost of Goods of:
- Widget 1: $247.68 (for 500 items) or a per-item cost of $0.50
- Widget 2: $61.92 (for 100 items) or a per-item cost of $0.62
You may notice there’s a potential rounding issue here, which we’ll address in a future blog post. Stay tuned:)
In Seller Ledger, once you categorize the purchase of $309.60 as “Inventory”, you might see a screen like this:
Just click “Add Details” and enter your newly allocated cost information like this:
Please note: this is only possible if you’re choosing to use item-level tracking in Seller Ledger. You can learn more about it by reading our support article.
We also have it on our list to automatically allocate costs based on the underlying receipt, so stay tuned for that too.
In summary – yes, sales tax, shipping and other fees should be included in Cost of Goods Sold. Hopefully this makes the subject a bit easier to understand.
As always, we’d love to hear any feedback you might have on the product, as well as any other critical questions you have about eCommerce accounting, bookkeeping, inventory and Cost of Goods Sold. Please reach out to us at [email protected].