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Fundamentally, there is almost no difference between a company's listed cost of goods sold (COGS) and cost of sales, otherwise known as the cost of revenue. In fact, the terms "cost of goods sold" and "cost of sales" are used interchangeably in almost any accounting context. Cost of sales and cost of goods sold both keep track of how much it costs a business to produce or purchase a good or service to be sold to customers. There is only one circumstance in which a meaningful distinction can be drawn between cost of sales and cost of goods sold: the tax deduction applied to COGS listed on the income statement.

Generally accepted accounting principles do not provide any detailed descriptions of cost of goods sold or cost of sales, which is one of the reasons why the two terms are lumped together so frequently. In general, companies that sell a lot of physical products tend to use cost of goods sold on their income statements, while service-based businesses tend to use cost of sales.

The Internal Revenue Service (IRS) allows businesses to claim cost of goods sold and receive a deduction for them. This can be a major boon to companies in capital-intensive industries, such as mining and manufacturing, where it is expensive to produce a finished good and bring it to market. Even retailers that only resell goods can claim the original purchase price for a tax deduction. IRS Publication 334 ("Tax Guide for Small Businesses") covers the COGS deduction in detail.

Expenses that can be listed as cost of goods sold and claimed include the costs of products or raw materials, freight or storage costs directly associated with the finished goods, direct labor costs for workers who produce the products (including retirement plan contributions), factory overhead costs and packaging for the products.

However, some businesses only offer a service and do not produce a physical product. Since service-only businesses cannot directly tie any operating expenses to something tangible, they cannot list any cost of goods sold on their income statements. Without any cost of goods sold on their income statements, they cannot claim any COGS deductions.

Instead of using cost of goods sold, service-only companies list cost of sales (or cost of revenue). Examples of businesses that have no cost of goods sold include attorneys, painters, business consultants, doctors and dancers. Even though there are expenses associated with providing these services, there are no goods on which the costs can be pinned.

Some businesses, such as plumbers or computer technicians, initially appear to be service-only but actually are not. These professionals sometimes have to purchase and replace parts. Since they charge their customers for those parts, they can deduct them as cost of goods sold.

Some service providers offer secondary products to their customers; for example, airlines offer food and beverages, and some hotels offer souvenirs. These can also be listed as cost of goods sold. Companies that have both services and goods are likely to have both cost of goods sold and cost of sales appear on their income statements.

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