How the bar business handles sales tax

(FORTUNE Small Business) -- Dear FSB: I run a small tavern in Wisconsin from mid-April through mid-November. I do not collect sales tax from the customers, but do pay in monthly to the state. Does this become a business expense deduction on Schedule C?

- Shirley King, Elmood, Wis.

Dear Shirley: The short answer is yes, says Deborah A. Kossow, a CPA and partner at Clifton Gunderson LLP in Milwaukee.

What usually happens in a tavern setting is that the prices charged include sales tax already, she says. So, if you report gross receipts, the collection of taxes is already included in there, and you can deduct it back out - what you paid in taxes does not count as income. In your tavern, you should have something posted that says "sales tax included."

"That's how it's done in Wisconsin," Kossow says.

Jim Brandenburg, a CPA with Brookfield, Wis.- based Kolb & Co., agrees. "The important thing is that you're sure to pay that sales tax," he notes. "In Wisconsin, as in other states, the government will look to make sure that tax is being paid in."

He also suggests taking a look at Wisconsin Department of Revenue Publication #201, which explains Wisconsin sales and use taxes.

Tom Ochsenschlager, vice president of taxation at the New York-based American Institute of Certified Public Accountants, agrees.

"Normally a retail merchant does not report income for the sales tax they collect, and, similarly, does not take a deduction for the same sales tax that they remit to the state or local taxing jurisdiction," he says. "In your case, the bar does not collect the sales tax but remits the proper amount as if they had collected it."

For example, if a bar sells a beer for $2 and the sales tax should be 5%, the bar can say that they sold the beer for $1.90 plus the $0.10 tax. In effect, the bar gets a 'deduction' for the tax in the sense that it doesn't have to report the $0.10 as income.

Check with your own tax professional to make sure this is the correct reporting method for your specific situation.