Sales Tax Changes QuickBooks® 2002

Author: Douglas Sleeter and Joe Woodard  Created: Wed Apr 24 15:13:16 2002

Setting up Sales Tax

If you sell products and/or certain types of services, chances are you’ll need to collect sales tax. In most states, each county has a different tax rate, and you are required to track and report all your sales by county. If you sell non-taxable goods (e.g. products to resellers or retail sales to government agencies) many states also require a breakdown of total non-taxable sales and the reason for the non-taxability. You might even have to track sales by city and collect sales tax as different rates for each city in which you do business.

Turning on Sales Tax and Setting up Sales Tax Preferences

You must set up your Sales Tax Preferences before using the Sales Tax feature in QuickBooks.

Step 1.       Select the Edit menu and choose Preferences.

Step 2.       Select Sales Tax and then click the Company Preferences tab (see Figure 1).

Figure 1 Sales Tax Company Preferences

Step 3.       Select Yes in the Do You Charge Sales Tax section to turn on sales tax tracking (see Figure 2).

Figure 2 Use these options to turn on sales tax tracking

Step 4.       “As of invoice date” in the Owe Sales Tax section is preselected (see Figure 3).

If you select “As of Invoice date” in this section, sales tax reports will show that you owe sales tax for all sales to your customers, including Invoices your customers have not paid. On the other hand, if you select “Upon receipt of payment,” the reports will only show that you owe sales tax when your customers have paid for the products you sell. Check your state sales tax rules and set this Sales Tax Preference accordingly.

Step 5.       In the Default Sales Tax Code section, “Tax” is preselected in the Taxable field and “Non” is preselected in the Non-Taxable field (see Figure 4).

The codes you enter here will be the default codes when you set up Customers and Items. It is usually best to accept the QuickBooks defaults for this step. You can always override the Sales Tax Code on each customer record and Item setup screen. (For more information about Sales Tax Codes see Setting up Sales Tax Codes on page 7.)

Figure 4 Select the default Sales Tax Codes

Step 6.       “Monthly” in the Pay Sales Tax section is preselected (see Figure 5).

Most states require you to pay sales tax monthly. However, if your company pays Quarterly or Annually select the appropriate option on this screen.

Figure 5 Pay Sales Tax section

Step 7.       “Contra Costa” in the Most common sales tax field is preselected (see Figure 6).

When you turn on Sales Tax tracking for the first time, this field will be blank. Select Add New from the drop-down menu and set up at least one Sales Tax Item. (See Setting Up Sales Tax Items below for more information.) If you do not enter a Sales Tax Item in this field, QuickBooks will not let you save your changes to the Sales Tax Preferences.

Step 8.       The Mark taxable amounts with “T” when printing box is preselected (see Figure 6).

When you enter Items on invoices that increase or decrease the amount of sales tax the customer owes (e.g. Inventory Part Items or Discounts on Products sold) QuickBooks will show a “T” next to the item on the printed invoice. It is almost always best to leave this box checked.

Step 9.       Click OK to save your changes.

Step 10.     QuickBooks may display the Updating Sales Tax screen (see Figure 7). Click OK.

If you created Items or Customer Records with Sales Tax Tracking turned off, QuickBooks provides the option to automatically enter the “Tax” Sales Tax Code in Customer Records and Inventory and Non-inventory Part Items. It is almost always best to leave both of these boxes checked. If necessary, you can edit each Customer record and Item setup screen individually. (See Editing the Sales Tax Codes on Item Setup Screens and Customer Records below for more information.)

Figure 7 The Updating Sales Tax screen

Setting Up Sales Tax Items

Use Sales Tax Items on Invoices to increase the amount of sales tax a customer owes you as shown in Figure 6.

Figure 8 Invoice using the “Contra Costa” Sales Tax Item

Create a separate Sales Tax Item for each agency to whom you pay sales tax and for each county in which you collect sales tax. If you pay sales tax to only one agency (e.g. California’s State Board of Equalization) but you collect sales tax in several different counties, create a separate Sales Tax Item for each county in which you sell products. If your state also requires a breakdown of taxable sales by each city in the county, create a separate sales tax Item for each city in which you sell products. Doing so will allow you to track sales tax activity and adjust sales tax rates for each county or city while writing a single check to the sales tax agency.

 

 

Step 1.       Select the Lists menu and choose Item List.

Step 2.       To add a new Item, select the Item menu at the bottom of the Item list and choose New.

Step 3.       Choose “Sales Tax Item” from the Type field drop-down menu and press Tab.

Step 4.       Enter the Tax Name, Description, Tax Rate and Tax Agency as shown in Figure 9.

This item will track all sales activity (taxable and nontaxable) for Alameda county and will charge each customer 8.25% is sales tax. The sales taxes collected using the Alameda Sales Tax Item will increase the amount due to the State Board of Equalization – the sales tax agency for the state of California.  

Figure 9 Setting up a Sales Tax item

After you add all of your sales tax items as shown in Figure 9 your Item list will look similar to Figure 10.

Figure 10 The Item list

Setting up Sales Tax Group Items

Use Sales Tax Groups only if you pay sales tax to more than one sales tax agency (e.g. county and state). Sales Tax Groups allow you to combine Sales Tax Items together so that each city tax, district tax, county tax, and state tax is tracked separately, while only the combined rate of all the Sales Tax Items shows on sales forms. For example, if the county charges sales tax at a rate of 4% and the state charges sales tax at a rate of 4.25%, the combined rate collected from the customer would be 8.25%.

Step 1.     Create separate Sales Tax Items for the county and the state as shown in Figure 11 and Figure 12.

Figure 11 Sales Tax Item for Contra Costa county

Figure 12 Sales Tax Item for the State of California

Step 2.       With the Item list open, select the Item menu and choose New. Then select “Sales Tax Group” from the Type field drop-down menu.

Step 3.       Using Figure 13 as a reference, enter the Tax Name and Description and then select the Contra Costa County and State of California Sales Tax Items in the Tax Item field at the bottom of the screen.

Notice that the combined rate of these two Sales Tax Items is 8.25%. This is the rate the customer will see on Invoices and Sales Receipts when you use this Sales Tax Group Item. On each sale, QuickBooks will allocate 4.0% to the Contra Costa County Item and 4.25% to the State of California Item. When you pay sales tax, QuickBooks will create separate checks to the county agency and the state agency for the appropriate amounts.

Step 4.       Click OK to save the Sales Tax Group Item.

 

Setting up Sales Tax Codes

Sales Tax Codes are an additional Sales Track tracking list that you associate with Customers and Products/Services you sell. Sales Tax Codes serve two purposes:

1.      Sales Tax Codes Make Sales (or Specific Products you Sell) Taxable or Non-Taxable

Each Sales Tax Code has a taxable or non-taxable status (see Figure 14).

Figure 14 You can create taxable and non-taxable Sales Tax Codes

If you use a Sales Tax Code with a taxable status in the Customer Tax Code field on Invoices and Sales Receipts, QuickBooks will charge the customer sales tax (see Figure 15). If you use a Sales Tax Code with a non-taxable status, QuickBooks will not charge the customer sales tax.

Figure 15 A taxable Invoice to Bill Young

If you use a Sales Tax Code on a line in the body of the Invoice when selling products or services (e.g. a 104-Slider Inventory Item), QuickBooks will charge sales tax for the sale of that Item (see Figure 15).

When you set up customers in QuickBooks, the default code you enter on Customer records will become the default code for the Customer Tax Code field on Invoices or Sales Receipts (see Figure 21). When you set up Items, the default code you enter will determine the default code for that line in the body of the Invoice (Figure 20).

2.      Sales Tax Codes Categorize Revenue Based on the Reason You Charged or Didn’t Charge Sales Tax

You can use Sales Tax Codes to categorize your sales by the reason you charged, or didn’t charge, sales tax. For example, you can create a separate Sales Tax Code for each type of customer for whom you do not charge sales tax, like government agencies, not-for-profit organizations or resellers (see Figure 16).

Figure 16 The Sales Tax Code List

QuickBooks provides a breakdown of revenue by Sales Tax Code on a report called Sales Tax Revenue Summary, but if you do not add additional Sales Tax Codes the report will only show total taxable and non-taxable sales (see Figure 17).

Figure 17 Sales Tax Revenue Summary with QuickBooks default Sales Tax Codes

When you add additional Sales Tax Codes as shown in Figure 16, QuickBooks will provide a separate column for total sales to each type of non-taxable customer (see Figure 17.

Figure 18 Sales Tax Revenue Summary with additional Sales Tax Codes

Editing the Sales Tax Codes on Item Setup Screens and Customer Records

After you turn on Sales Tax Tracking, QuickBooks displays the screen shown in Figure 7. If you leave both boxes checked, QuickBooks will add the default Sales Tax Code in the Taxable field of the Sales Tax Preferences to each Inventory Part, Non-Inventory Part, and Discount Item in the Item list. It will add the default Sales Tax Code you entered in the Non-taxable field of the Sales Tax Preferences to all other Items. QuickBooks will also add the default Taxable Sales Tax Code and the default Sales Tax Item in the Sales Tax Preferences to all existing Customer records in the file. You may need to change these defaults on selected Customer records and Item setup screens.

Step 1.       Select the Reports menu, choose List and then choose Item Listing.

Step 2.       Move your cursor over the Sales Tax Code column header. Your cursor will become a “hand.” Click and drag the column so that it appears immediately to the right of the Item column (see Figure 19).

Figure 19 Item Listing showing Sales Tax Codes for each Item

Step 3.       If you need to edit the Sales Tax Code on an Item in the list, double-click the Item name and edit the Tax Code field (see Figure 20).

Figure 20 Edit the Sales Tax Code on each Item as necessary.

Step 4.       Select the Lists menu and choose Customer:Job List.

Step 5.       Double-click on each Customer name in the list to open the Edit Customer screen. Click the Additional Information tab and review the information in the Tax Code and Tax Item fields (see Figure 21). Make changes to each of these fields as necessary.  

Figure 21 Edit the Sales Tax Code and Sales Tax Item for each customer as necessary.

QuickBooks and Your Sales Tax Return

Academy Glass files their sales tax return to a single vendor called the State Board of Equalization. Academy Glass files monthly and needs to file their sales tax return for the first quarter of 2002.

The Sales Tax Liability Report

Begin by creating a Sales Tax Liability Report. The Sales Tax Liability report provides you with the information you need to prepare you sales tax return, including a breakdown of sales and sales tax collected by county and sales tax agency.

Step 1.      Select the Reports menu, choose Vendors & Payables, and then choose Sales Tax Liability.

Step 2.      Set date fields to 01/01/2002 through 03/31/2002 and press TAB (see Figure 22).

Figure 22 The Sales Tax Liability report

The Sales Tax Liability report shows total sales in each county (e.g. sales tax Item), and shows the taxable sales separately from the nontaxable sales. Also, you can see the tax rates and tax collected in each county. The column to the far right shows how much you still owe of the tax you’ve collected. If you have made any sales tax payments, the amount due will reflect those payments. To see the detail of transactions that feed the sales Tax Liability report, double-click on any number in the report. The State Board of Equalization – Other line on the report shows any adjustments to Sales Tax payable that you make using a General Journal Entry or the Sales Tax Adjustment screen (see Figure 23). This line is zero because there are no sales tax adjustments recorded in the file.

Recording Discounts, Penalties, Interest and Rounding

The amount of sales tax you owe on the sales tax return will almost never agree to the amount accrued in QuickBooks due to several reasons:

• Some sales tax agencies require you to round sales tax to the nearest dollar when preparing the return.

• Almost all sales tax agencies offer discounts for timely filing.

• Almost all sales tax agencies charge interest and penalties for filing late. (Though interest and penalties are often paid separately, most agencies provide an option for including them with the return.)

You will need to create a Sales Tax Adjustment after you prepare your return but before you record a sales tax payment to adjust the amount of sales tax you owe. For example, Academy Glass’ sales tax return for the first quarter of 2002 includes a round-off amount of $0.90.

Step 1.    Select the Vendors menu, choose Sales Tax and then choose Adjust Sales Tax Due. This opens the Sales Tax Adjustment screen shown in Figure 23.

Step 2.       Enter 03/31/2002 in the Adjustment Date field and press Tab twice.

In the Adjustment Date field, enter the last day of the month for which you are filing your sales tax returns and making sales tax payments.

Step 3.       “2002-2” in the Entry No. field is preselected. Press Tab.

When you record an adjustment to sales tax on the Sales Tax Adjustment screen, QuickBooks create a General Journal Entry transaction. Therefore, QuickBooks enters this number sequentially using the same numbering sequence as the General Journal Entry screen.

Step 4.       Enter “State Board of Equalization” in the Sales Tax Vendor field and press Tab.

This is the sales tax agency to whom you pay sales tax. If you file sales tax returns to more than one agency, you will need to create enter a separate Sales Tax Adjustment for each sales tax return you file.

Step 5.       Enter “Other Income” in the Adjustment Account field.

Since you are recording a discount for timely filing, select the Other Income account. If you are recording penalties or interest, enter the Interest Expense account in the Adjustment Account field. If you are recording rounding, enter the Miscellaneous Expense (or Rounding Clearing) account.

 

Step 6.       Select Reduce Sales Tax By in the Adjustment section.

Since you are using this sales tax adjustment to record a discount you want to reduce the amount of sales tax you owe. If you are recording interest or penalties you would select Increase Sales Tax By in this section.

Step 7.       Enter “0.90” in the Amount field and press Tab.

Step 8.       Enter “Sales Tax Adjustment - Roundoff” in the Memo field.

Step 9.       Click OKto record the adjustment.

Figure 23 The Sales Tax Adjustment screen

The Sales Tax Liability report now shows the $-0.90 adjustment in the State Board of Equalization – Other row (see Figure 24). The total in the Sales Tax Payable column now agrees to the total sales tax due on the return.  

Figure 24 Sales Tax Liability Report showing the timely filing discount

Paying Sales Tax

After you prepare your sales tax return and make necessary adjustments for discounts, interest, penalties or rounding, you will need to create a check to the sales tax agency for the amount you owe.

 

Step 1.       Select the Vendors menu, choose Sales Tax and then choose Pay Sales Tax.

Step 2.       “Checking” in the Pay From Account field is preselected, press Tab.

Choose the account from which you wish to pay your sales tax.

Step 3.       Enter 04/15/2002 in the Check Date field and press Tab.

Enter the date on which you are paying the sales tax.

Step 4.       Enter 03/31/2002 in the Show sales tax due through field and press Tab.

Enter the last day of the sales tax reporting period in this field. For example, if you are filing your sales tax return for the first quarter, enter the last day of March in this field.

Step 5.       “338” in the Starting Check No field is preselected. Press Tab.

QuickBooks automatically enters the next check number sequentially. Since the last check from Academy Glass was #337, QuickBooks entered “338” in this field.

Step 6.       Click the Pay column (Figure 25) for each Sales Tax Item you wish to pay.

QuickBooks will create one check (TAXPMT ) transaction in your checking account for the total tax due to each sales tax agency (Vendor).

Step 7.       Click the Pay column on the line showing “-0.90” in the Amt Due column.

This negative amount is the round-off amount you recorded using the Sales Tax Adjustment screen shown in Figure 23. Because the discount reduces the amount of sales tax you owe, it shows here as a negative number.

Step 8.       QuickBooks now shows a total of $121.00 for this Sales Tax Payment, representing the amount of Contra Costa and Santa Clara sales tax, less the timely filing discount. Click OK to record the Sales Tax Payment.

 

Figure 25 The Pay Sales Tax screen.

Conclusion

Sales tax tracking is automatic and runs smoothly if you setup and operate QuickBooks correctly. If your QuickBooks file was not set up correctly, or if the Sales Tax feature has not been properly used in transactions, you will probably have a significant amount of troubleshooting to do in order to diagnose and repair the problems. It is very important to ensure that your setup and data entry procedures are accurate in order to keep the sales tax feature working smoothly. This is a very complicated and time-consuming process for which you may want to seek the help of a Sleeter Group Certified Consultant. (Visit our website at www.sleeter.com to search for a consultant in your area.) The Sleeter Group’s Consultant’s Reference Guide also contains information on troubleshooting the sales tax feature.