Are you confused about Sales Tax Items and Sales Tax Codes in QuickBooks? I was too! It took me forever to finally figure out what they actually did, how to get the sales tax liability report to look right, and where they showed up on that report. After reading the QuickBooks help, and reading tons of articles online, I still had no clear answer. But I finally figured out how to set things up in a way that makes sense to me – I hope it makes sense to you too.
We’re going to discuss the proper setup of sales tax items and codes; proper setup of customers for sales tax reporting; the difference between sales tax items and sales tax codes; using sales tax codes; and running sales tax reports in QuickBooks.
Proper Setup of Sales Tax Items and Sales Tax Codes
These guidelines assume that you have no Sales Tax Items or Sales Tax Codes set up yet in QuickBooks. However, many of you reading this already do. If this is the case, just go through your lists and see if your items and codes are set up like these. IMPORTANT: I strongly suggest that you do not change anything in your QuickBooks file until you read this entire article and understand it!
First, determine how many sales tax agencies and rates you need to report. You will need to set up your Sales Tax Items depending on this information. If you are unsure, contact a local accountant.
Here’s how to set up the Items and Codes:
From the Items List, press Control-N. Select Sales Tax Item. Enter a name for the sales tax – something simple is fine, something that makes sense to you. Enter a more detailed description on the next line. Enter the tax rate, and choose the state reporting agency where the tax will be remitted.
Then, set up a non-taxable Sales Tax Item. From the Items List, press Control-N. Select Sales Tax Item. Item name should be Non-Taxable Sales. Enter a brief description, and 0.00% for the rate. Even though this is non-taxable, select the main tax agency you use.
Next, setup your sales tax codes. It will be helpful to have your sales tax return in front of you to do this. For example, for California, on BOE-401-A page two, there is a list of all of the reasons sales may be non-taxable. Here are some of them:
Sales to the U.S. government
Out of state sales
From the Lists menu, select Sales Tax Code list. Then press Control-N. Enter a three-character code and description for each. For example, for non-taxable labor, you can use a three-character code of LBR, and a description of, “Labor Sales – non-taxable.” Do this for all of the reasons that sales are non-taxable. Make sure the Non-taxable circle is selected.
For taxable sales, set up a Sales Tax Code called TAX. Write a brief description. Make sure the Taxable circle is selected.
Proper Setup of Customers for Sales Tax Reporting
It’s important that the customers are set up correctly, because when invoices are generated, they will default to the setup you use here.
Go to the customer list, pick a customer you want to examine, right click, and select Edit Customer:Job. Click the Additional Info tab. In the bottom left area you will see Sales Tax Information.
First, select the Tax Item box. If this customer lives out of state or is otherwise non-taxable, select the Non Taxable sales tax item you established above. If the customer lives in-state or is otherwise taxable, select the Taxable sales tax item you established above.
Next, select the Tax Code box. If the customer is out of state and non-taxable, select the code, “OOS.” If the customer is the U.S. government, select the tax code you established for these types of sales. If the customer is in state, select the code, “TAX.” Generally, you will only need to use these codes in these screens for all customers.
Any time you generate an invoice for your customers, QuickBooks will default to the sales tax items and codes you established in the Edit Customer:Job screen.
Understand the Difference Between Sales Tax Items and Sales Tax Codes
The Sales Tax Item tells QuickBooks how much sales tax to computer for a given sale. On invoices, they are located just above and to the left of the Total. Sales Tax Items are pretty straightforward to understand and use.
The Sales Tax code tells QuickBooks why the customer or sale was taxable or non taxable. They are located along the right side of the invoice screen. Also in the invoice screen, in the grey area above the Memo line, you will also see a box that says Customer Tax Code. This defaults to the Tax Code you established above for each customer.
Sales Tax Codes are important, because the California sales tax return BOE-401-A requires that non-taxable sales be itemized. If the codes are setup and used correctly in QuickBooks, the reports will show this itemization.
Using Sales Tax Codes
As a general rule, anytime you have an out-of-state customer, you will use the Non Taxable Sales Tax Item, and the OOS Sales Tax Code. My recommendation is that even if there is non taxable labor or non taxable shipping on the invoice, do not change the codes, still use OOS.
For taxable customers, use the Taxable Sales Tax Item on their invoices. However, you may need to use different Sales Tax Codes on different lines. For example, you may sell some products to a customer, but on the same invoice you may have non-taxable shipping or labor. You will need to make sure the SHP or LBR codes show up correctly, and that the TAX code shows correctly along the right side of the invoice. This will compute sales tax only for your products, and not for your shipping and/or labor.
Running Sales Tax Reports in QuickBooks
If you’ve taken the time to get everything set up correctly, you efforts will pay off when it’s time to run sales tax reports!
From the Vendors menu, select Sales Tax, then Sales Tax Liability. Make certain of the date range, that it matches the date range of your sales tax return.
You will see several columns, most notably Total Sales, Non-Taxable Sales, and Taxable Sales. Notice that the Sales Tax Items are listed down the left side, underneath the state agency. Also notice that the Sales Tax Codes do not appear on this report.
In order to see the Sales Tax Codes (remember, these are the reasons why sales are taxable or non-taxable), go to the Non-Taxable Sales column, and find the amount that intersects with the Non Taxable sales row. Double click. This report will show all of the amounts used for the Sales Tax Codes for Non Taxable sales. Use this information to help you prepare your sales tax return (for California, this information should appear on BOE-401-A, page 2).
The Sales Tax Liability Report can be used to finish the rest of the sales tax return.
Sales tax collection and reporting is very complex, and varies considerably even from city to city in some cases. These guidelines are intended to be general in nature, giving a broad overview of the sales tax process in QuickBooks. If you need more help, please refer to a professional who can help you make sure everything is set up according to your unique location and needs. If you wish, you can experiment with the ideas here in a Sample Company File, which was loaded onto your computer when you loaded QuickBooks.