If a customer refuses to pay an invoice that has sales tax on it, what is the best way to deal with it for a cash-basis client?

For a cash-basis client, the best approach when a customer refuses to pay an invoice that includes sales tax is to write off the invoice immediately. This method accurately reflects the reality of the client's accounting situation. Cash-basis accounting recognizes income and expenses only when cash is exchanged. Therefore, if the customer is refusing to pay, the business has not received that income, and keeping the invoice on the books could misrepresent the financial state of the business.

Writing off the invoice removes it from the accounts receivable balance and acknowledges that no cash was ultimately received from that transaction. This action helps maintain accurate financial reporting, ensuring the business's books reflect only actual income received.

Choosing to leave the invoice as is could lead to inaccuracies in financial reporting, as it would suggest that the amount is still potentially collectible. Adjusting the invoice amount could have complications, particularly regarding tax records and compliance, as the original tax liability must be accounted for correctly. Refunding the sales tax does not address the issue of the unpaid invoice itself and may not be appropriate if the customer refuses to pay the entire invoice.

In summary, writing off the invoice is the most straightforward and compliant method to address this situation within cash-basis accounting.