If your CPA is not from the petroleum industry, he or she may think that excise taxes should not be included in your sales revenue. That opinion comes from traditional accounting procedures that say that sales taxes are a pass-through and therefore not revenue.
With petroleum products, however, excise taxes comprise a significant percentage of each dollar of fuel sold. Add to that the complexity of when and how that tax is applied, collected and paid, and you begin to realize the significance of the taxes and why they should be included in sales revenue and cost of goods sold.
If your CPA still balks at including taxes as revenue, perhaps the most persuasive argument rests with the difficulty ex-tax revenue poses for ratio analysis. Take for example the old stand-by of accounts receivable collection time measured in days sales outstanding.
The formula for this ratio is:
Account Receivable $
Average Daily Sales
If any unsuspecting creditor (such as a banker) picks up the financial statement of a company that reports A/R with taxes included (as almost all do) and Sales without taxes, the resulting number will be way too large.
For example. let’s assume a company has $1,000,000 in accounts receivable, sales with taxes of $62,500 per day and without taxes of $47,000 per day. Here’s how the receivables ratios would differ:
There is a 5 day collection time difference or an error of 31% longer when the no sales tax revenue amount is used!
With excise taxes excluded, the next problem occurs when an uninformed banker performs this calculation, gets 21 days, and thinks your company is much slower in collection time than the average for the industry. So next, the banker asks to see your aging and listing. Your aging and listing shows most of your accounts current (remember you are actually collecting in 16 days), but the aging and listing doesn’t match with the banker’s findings of a 21 day collection time.
Now the banker gets worried that perhaps your aging is not correct which leads to concern about the integrity of your financial system and whether they should be lending you money for your receivables. And all this because you didn’t include taxes in your sales revenue!
The solution, even for the most stubborn, by-the-rules CPA, is to at least include tax as a line item on your financial statements. If you segregate products (for example gas from diesel), it’s preferable to also segregate the two taxes.
Including the fuel taxes in your sales will also provide for more accurate cash flow reports (see this month’s CashFlow Strategies column). As you already know, the timing of tax payments has a significant impact on any petroleum business’ cash flow and taxes should be reflected accurately if you are to manage that cash flow.
If your GL program does not currently reflect taxes in sales revenue, check with your software provider for how to modify your system. A vendor should be able to meet your request, even if their original programming was not designed with taxes in revenue. They are already keeping track of taxes in other modules of your GL system, and with a little tweaking can get those figures into your month-end profit and loss statements.