In the meantime, if you’re trying to help clients who have just the standard, vanilla QuickBooks, it’s important that you get things set up correctly and that data entry is done correctly and consistently. To help you do that, here are several tips for how to set up, track and troubleshoot sales tax in QuickBooks.
SALES TAX ITEMS
The first thing to know about how QuickBooks tracks sales tax is to understand that Sales Tax Items are used on sales forms to calculate the amount of sales tax due on each sale. You set up Sales Tax Items in a list where you define the name, tax rate and agency to which you pay this tax. Quite often, a given tax rate is the sum of several component taxes, such as the state sales tax, the county sales tax, a redevelopment agency tax or a public transportation tax. Also, some states require you to pay these separate tax amounts directly to each taxing authority (state, county or other agency) while many states collect all the taxes and then distribute the money to each of the local governments and agencies.
Since QuickBooks allows you to create several individual tax items (with each portion of the total tax) for each tax agency, many people question whether they should just create one item for the full tax amount (say 8 percent), or should they create separate items for each of the small taxes, and then create a “Sales Tax Group” that combines those smaller items into one total tax.
The key to deciding whether to create individual items plus a group, or whether you should create just one item with the total of the combined tax, is to find out if you need to pay the individual taxes to each agency. If you do, you’ll need to create individual tax items for each tax agency. If the state collects and distributes the taxes (i.e., you pay it all to a single agency), then all you need to do in QuickBooks is create one single tax item for each county (or other dividing line) in which you collect tax.
SALES TAX CODES
Sales Tax Codes are an additional classification for calculating and reporting sales tax. A Sales Tax Code is assigned to each product or service item, as well as to each customer.
Sales Tax Codes serve two purposes. First, they indicate whether a specific product or service is taxable or non-taxable. Secondly, they categorize revenue based on the reason you charged or didn’t charge sales tax.
If your sales tax agency requires reporting for different types of exempt sales, you may wish to create several non-taxable Sales Tax Codes for each type of non-taxable sale (e.g., RSR for non-taxable resellers).
USING SALES TAX ITEMS & CODES ON SALES FORMS
On sales forms, Sales Tax is calculated at the bottom of the form, separately from the rest of the Items on the form (see Figure 1).
HOW SALES TAX IS CALCULATED BY QUICKBOOKS
When you properly set up your QuickBooks items, Customers, Sales Tax Codes and Preferences, QuickBooks automatically calculates and tracks sales tax on each sale.
As illustrated in Figure 2 and detailed in the steps above, each line on a sale shows a separate Item that is taxed according to the combination of how the Item, Tax Code, and Customer is set up. When you set up Items, you indicate which Sales Tax Code normally applies to that item. In addition, when you set up a customer record, you indicate the Sales Tax Item and Sales Tax Code to be used for that customer.
Then, when you create a sale (Invoice or Sales Receipt), the Customer Tax Code and the Sales Tax Item are taken from the customer’s record and filled into the Customer Tax Code and Tax fields on the form. The Customer Tax Code overrides the Tax Code on each line item. If necessary, you can override the Tax Code on each line of the sales form or at the bottom of the form. The Tax Item, which can also be overridden, determines the rate to charge on the sum of all taxable line items on the sale.
THE SALES TAX LIABILITY REPORT
The Sales Tax Liability report provides you with the information you need to prepare your sales tax return, including a breakdown of sales and sales tax collected by county and sales tax agency.