Discounts provided for customer payments made within a certain number of days based on the invoice terms is a common practice. But should the business providing those discounts be allowed to take a reduction in the month when the payment is received if the discount relates to an invoice that included sales tax?
In twenty states, this is currently allowed. In twenty-four states, it is not.
There are two schools of thought and hence the very different treatment that relates to these discounts when sales tax is involved. One position is that, no, the business is offering these terms as an incentive for its own benefit and to speed up the receipt of cash. Accordingly, why should a given state agency help to subsidize and accept a reduction in sales tax for something that is simply a financing mechanism to improve the cash flow of the business? On the other hand, the discount can be perceived as a reduction to the sales amount of the original invoice and hence the business is entitled to receive a sales tax deduction (based on the sales tax rate multiplied by the discount taken) as if the discount was initially provided.
In those states that allow a business to make an adjustment relating to customer discounts on payments made within a certain number of days dictated by invoice terms, and assuming that the business reports their sales income on the accrual basis of accounting, an adjustment for customer discounts relating to taxable invoices can only be taken when the discounted payment is actually received, and it is reported not by directly reducing gross sales but rather as a separate line item adjustment on the applicable state sales tax return as a general rule.
A state summary follows.
States that allow an adjustment
Arizona
Arkansas
California
Connecticut
Georgia
Iowa
Kansas
Louisiana
Michigan
Minnesota
Nebraska
New Mexico (note: NM does not have a traditional sales tax)
North Carolina
Oklahoma
South Carolina
Tennessee
Utah
Virginia (but must be mathematically proportioned)
Washington
Wisconsin
Total: 20
States that do not allow an adjustment
Alabama
Colorado
Florida
Idaho
Illinois
Indiana
Kentucky
Maine
Maryland
Massachusetts
Mississippi
Missouri
Nevada
New Jersey
New York
North Dakota
Ohio
Pennsylvania
Rhode Island
South Dakota
Texas
Vermont
West Virginia
Total: 24
States with no sales tax
Alaska
Delaware
Hawaii
Montana
New Hampshire
Oregon
Total: 6
