A tax is recoverable if you can deduct the tax that you've paid from the tax that you have collected.
A tax is non-recoverable if you have to remit the full amount you've collected regardless of what you may have paid (in the same tax).
TIP: Once you create a tax, you cannot change the recoverable or non-recoverable option. So, when you create the tax, be sure you know if it is recoverable or not!
Example 1: Recoverable Taxes
Let's imagine a customer, Jane, who sells widgets. In the state where Jane does business, there's a sales tax called Unpleasant Tax 1 (UT1). The tax rate is 5%. UT1 is recoverable.
When Jane sells $100 of widgets, she charges 5% UT1. In other words, she collects $5 in UT1.
When Jane buys paper for the office printer for $20, she pays 5% UT1, which works out to $1.
Since UT1 is recoverable, when it comes time to remit the tax she's collected to the government, Jane subtracts the tax paid ($1) from the tax collected ($5), and sends the government $4.
Example 2: Non-Recoverable Taxes
Let's imagine another customer, Paula. In the state where Paula does business, there's a sales tax called Unpleasant Tax 2 (UT2). The tax rate is 5%. UT2 is non-recoverable.
When Paula sells $100 worth of gaskets, she charges 5% UT2 and she collects $5 in UT2.
When Paula buys paper for the office for $20, she pays 5% UT2, which works out to $1.
Since UT2 is non-recoverable, when it comes time to remit the tax she's collected to the government, Paula ignores the tax that she has paid, and sends the government all the money she collected, in other words the full $5.
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