From the IRS Audit a Salon / Barbershop Guide
There are two methods in reconstructing retail revenue. The first method is based on Cost of Goods Sold (COGS). Retail revenue is directly related to COGS. In this industry, most hair and skin products are marked-up 100 percent. An examiner can take COGS and double the expense, which can then be used as a gauge for retail revenue.
The IRS will expect that you markup your sold merchandise at 100% (double your cost). So if you pay $10 at the wholesale beauty supply store, then they expect you'll sell it for atleast $20.
You'll likely have receipts for merchandise you purchase to sell. These will be expenses for your business and will soon turn to sales. If you get audited, the IRS will comb through those receipts and check you're not falsifying income. We recommend that you create your own expense category 'Merchandise', to keep track of those specific expenses. Then you'll have double or more merchandise sales that you can track against. It's important to note that Salon Accounting is setup so the tax is not included in your income, but is tracked based on your sales tax rate. This amount should be paid to the IRS as sales tax on merchandise sales on a regular basis (either monthly or quarterly). Check out this guide for Sales Tax 101 Basics