Setting Up Sales Tax

 If you don’t have to collect and remit sales tax, skip this section and give thanks. Sales taxes aren’t much more fun in QuickBooks than they are in real life. Confusingly, QuickBooks has two features for dealing with sales tax: codes and items. If you sell taxable and nontaxable products or services, Sales Tax codes specify whether or not an invoice item is taxable. Sales Tax items, on the other hand,

let you calculate and organize sales taxes charged by state and local authorities for the items on your invoices or other sales forms.

This section describes both features and how to use them. If you sell products in a place burdened with multiple sales taxes (state, city, and local, say), you can use a Sales Tax Group item to calculate the total sales tax you have to charge. Your sales form shows only the total, but QuickBooks keeps track of what you owe to each agency.

Note: Before you can dive into the details of setting up sales tax, you need to turn on QuickBooks’ sales tax feature.

For most product sales in most areas, you have to keep track of the sales taxes you collect and then send them to the appropriate tax agencies. Labor usually isn’t taxable, whereas products usually are. Creating separate items for labor and materials makes it easy to apply sales tax to the right items or subtotals on your invoices.   

Separating the items you’ve identified as taxable or nontaxable can help you decide whether you need one or more items for a particular service or product. You can then assign sales tax codes to the items you create for services and products. As you’ll learn in the next section, QuickBooks has two built-in tax codes: Tax and Non.

Sales Tax Codes

Sales tax codes are QuickBooks’ way of letting you specify whether to apply sales tax. Out of the box, the Sales Tax Code List comes with two self-explanatory options: Tax and Non. If you’d like to further refine taxable status, for example, to specify why a sale isn’t taxable, you can add more choices. You can apply tax codes in two places: to customers or to individual sales items.

Assigning tax codes to customers

Nonprofit organizations and government agencies are usually tax-exempt (Non). To tell QuickBooks whether a customer pays sales tax, open the Edit Customer dialog box and click the Additional Info tab. Here’s how QuickBooks interprets a customer’s tax-exempt status:

 • Nontaxable customer. When you assign Non or another nontaxable sales tax code to customers, QuickBooks doesn’t calculate sales tax on any items you sell to them.

• Taxable customer. When you assign Tax or any taxable sales tax code to a customer, the program calculates sales tax only on the taxable items on their invoices.

Assigning tax codes to items

Some items aren’t taxable whether or not a customer pays sales tax. For example, most services and non-luxury goods like food don’t get taxed in most states. If you look carefully at the top invoice in Figure 5-10, you’ll notice Non or Tax to the right of some of the amounts, which indicates nontaxable and taxable items, respectively.

QuickBooks applies the sales tax only to taxable items to calculate the sales taxes on the invoice. Items include a Tax Code field so you can designate them as taxable or nontaxable. In the Create Item or Edit Item dialog box , choose a code in the Tax Code drop-down list.

Creating additional sales tax codes

Built-in tax codes aren’t QuickBooks’ most powerful feature: They let you mark customers and items as either taxable or nontaxable, and that’s it. Those two built-in options pretty much cover all possibilities, but you may want to create additional sales tax codes to classify nontaxable customers by their reason for exemption (nonprofit, government, wholesaler, out-of-state, and so on). If that’s the case, here’s how to create additional sales tax codes in QuickBooks:

1. Choose Lists➝Sales Tax Code List.

QuickBooks opens the Sales Tax Code List window.

2. To create a new code, press Ctrl+N or, at the bottom of the window, click Sales Tax Code➝New. The New Sales Tax Code dialog box opens.

3. In the Sales Tax Code box, type a one- to three-character code. For example, type Gov for a nontaxable sales tax code for government agencies, Whl for wholesalers who resell your products, or Oos for out-of-state customers, and so on.

4. In the Description box, add some helpful details about the code. For example, type a description that explains the purpose for the code, like Government for Gov.

5. Choose the Taxable or Non-taxable option. Sales tax codes are limited to taxable or nontaxable status.

6. Click Next if you want to add another code. The code you created appears in the Sales Tax Code List window.

7. When you’ve added all the codes you want, click OK to close the New Sales Tax Code dialog box.

As you can see, QuickBooks’ sales tax codes sport only a three-code ID, a description, and a taxable or nontaxable setting. They don’t let you specify a sales tax percentage or note which tax office to send the collected sales taxes. That’s where Sales Tax items (described next) come to the rescue.

Sales Tax Items

 QuickBooks’ built-in sales tax codes are fine for designating taxable status, but you also have to tell QuickBooks the rate and which tax authority levies the tax. If you sell products in more than one state, Sales Tax items are the way to deal with varying tax regulations. Like the IRS, each tax agency wants to receive the taxes it’s due. To track the taxes you owe to each agency, create a Sales Tax item for each agency. Also, if you sell products through direct mail, you’ll need a Sales Tax item for each state you ship to.

For example, suppose both local and state taxes apply to products you sell in your store. For customers to whom you ship goods in other states, sales taxes for those other states apply. You can create separate Sales Tax items for your local tax and the state sales taxes for each state in which you do business. Or, if one tax authority collects several sales taxes, QuickBooks has a Sales Tax Group feature to help you collect them all in one shot.   Setting Up Sales Tax

Unlike sales tax codes, which can apply to both customers and products, Sales Tax items apply only to customers, which makes sense when you think about it, since sales tax rates usually depend on the customer’s location. If the customer is in the boonies, you might assign the state Sales Tax item because the customer pays only that one tax. Alternatively, a customer smack in the middle of downtown might have to pay state tax, city tax, and a special district tax. If you assign Sales Tax items to customers, QuickBooks automatically fills in the Sales Tax item on your invoices to show the customer the sales taxes they pay.

To create a Sales Tax item, in the New Item dialog box, from the Type drop-down list, choose Sales Tax Item. Then fill in the fields (shown in Figure 5-13) as follows:

Figure 5-13:╇ You can fit up to 31 characters in the Tax Name field—more than enough to use the 4- or 5-digit codes that many states use for sales taxes. The Tax Rate (%) field sets the percentage of the sales tax. The Tax Agency drop-down list shows the vendors you’ve set up, so you can choose the tax agency to which you remit the taxes. If a tax authority collects the sales taxes for several government entities, a Sales Tax Group is the way to go.

• Sales Tax Name. Type in a name for the sales tax. You can use the identifiers that the tax authority uses, or a more meaningful name like Denver City Tax.

• Description. If you want QuickBooks to display a description of the tax on your invoices or sales forms, type it here.

• Tax Rate (%). In this box, type the percentage rate for the sales tax. QuickBooks automatically adds the percent sign, so simply type the decimal number—for example, 4.3 for a 4.3% tax rate.

• Tax Agency. In this drop-down list, choose the tax authority that collects the sales tax. If you haven’t created the vendor for the tax authority yet, choose <Add New>.   Modifying Items