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Of all the areas that QuickBooks® for Mac consultants struggle with, finding and fixing sales tax errors is one of the toughest because we can’t get the detailed reports our Windows’ counterparts have access to within the software.
Some of us – determined to track down those nagging discrepancies – turn to “round-tripping” (converting the file from Mac to Windows and back to Mac) only to find the data scrambled in the process. For others, the conversion to QuickBooks for Windows is successful and provides reports not available in QuickBooks for Mac, but finding the problem provides little relief if fixing it in Windows or Mac is not an option.
Here, we have provided a step-by-step guide for finding sales tax errors and our advice for fixing them. Spoiler alert: starting with QuickBooks Mac 2014, you can use the same “Adjust Sales Tax Due” feature that’s been available in Windows for years.
Sales Tax reporting errors can be caused by:
- Income transactions created with Journal Entries or Deposits
- Sales Discounts created with Receive Payments
- Sales Items mapped to Expense accounts, or Other Income accounts
- Sales tax paid by Check instead of Sales Tax Payment
- Prior period adjustments
- Receive Payments entered in prior periods
- And so much more …
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How to Find Sales Tax Errors
Start by creating both a Sales Tax Liability and a Profit and Loss report. The Total Income on both of these reports should the same. If they aren’t the same, make sure the dates and the reporting basis on the Profit and Loss report matches that of the Sales Tax Liability report.
EXPERT TIP: To set the reporting basis for the Sales Tax Liability report, go to QuickBooks > Preferences > Sales Tax
If the reporting basis or the dates are not the reason your Profit and Loss does not match your Sales Tax Liability report, create another Profit and Loss report and filter it for income transactions and compare it to the unfiltered Profit and Loss report. Any differences will point you to the errors on the Sales Tax Liability.
EXPERT TIP: The date on the Receive Payment, not the date on the Make Deposit or the Invoice, is the date that the sales tax liability will be impacted on cash basis. Partial payments are applied to sales tax in equal proportion to other Items on the Invoice.
1. Click the “Filters” icon at the top left of the report Toolbar.
2. Choose the filter “Transaction Type” near the bottom of the Filter options to engage the Transaction Type filter.
3. Choose “Selected Transaction Types”, and then chose Invoice; Sales Receipt; and Credit Memo.
4. Click “OK” to complete the Filter settings. Click “Apply” in the next window to create the filtered report.
5. Now, compare the Total Income on the filtered Profit and Loss report to the unfiltered report. Any differences will point you to the errors on the Sales Tax Liability, except Cost of Goods Sold. In this example, “Less Discounts Given” (-$720.00) and Other Income ($58.39) are not on the Sales Tax Liability report.
What to know: Sales Discounts applied during Receive Payments and Items mapped to Other Income Accounts and Balance Sheet accounts, will not be included in the Total Sales on the Sales Tax Liability report.
What to do about it: Create a Credit Memo for sales discounts instead of using Receive Payments. Map sales Items to Income, and not Other Income, accounts. If your client pays sales tax on deposits/pre-payments and tracks them as a liability, use the Sales by Item Detail report in addition to the Profit and Loss report.
Fixing Sales Tax Errors
Once you’ve found your discrepancies, the hardest work is done. The toughest part of fixing the errors usually isn’t the mechanics of entering an adjustment; it’s figuring out what amount and date of the adjustment should be. Now that we have the simple “Sales Tax Adjustment” function, it’s easy enough to adjust sales tax payable that we can show our clients how to do it. Future adjustments and late fees will be accurately reflected in reports and payments. To enter adjustments to sales tax payable in QuickBooks Mac 2014 and above, go to Vendors > Sales Tax Adjustments
EXPERT TIP: In QuickBooks Mac 2014 and above, the “Pay Sales Tax” function allows the user to select a credit card account to make sales tax payments. Prior versions only allowed for sales tax payments from bank accounts.
QuickBooks’ sales tax tracking features help you track the “who, what, why, where, and how much” of sales tax. The ultimate goal of QuickBooks sales tax tracking system is to properly calculate and collect sales tax and to properly report revenues tax collections, and tax payments in two two-dimensional reports called Sales Tax Revenue Summary and Sales Tax Liability.
From the June 2013 issue.
QuickBooks’ sales tax tracking features help you track the “who, what, why, where, and how much” of sales tax. The ultimate goal of QuickBooks sales tax tracking system is to properly calculate and collect sales tax and to properly report revenues tax collections, and tax payments in two two-dimensional reports called Sales Tax Revenue Summary and Sales Tax Liability.
When you set up customers (the “who”) in QuickBooks, you assign a default Sales Tax Code and Sales Tax Item to their customer record. When you set up Items in QuickBooks, you assign a Sales Tax Code and Sales Tax Item to each Item. As you think about how to set up and record sales tax in QuickBooks, keep in mind the following concepts:
Sales Tax Codes are used for three purposes. One purpose is to describe whether each customer is taxable or not, according to where they live, or what your business relationship is with that customer. For example, to track revenue from your out of state customers, you’ll should create a tax code called OOS (for out of state). If you sell to resellers, you will want to define a tax code of RSR (for Reseller). The second purpose is to tag certain sales items according to whether they are taxed or not. For example, if you do not charge sales tax on services, you should create a tax code called SRV (for service). Then, assign the Sales Tax Code SRV to your service Items. The third purpose of Sales Tax Codes is to track revenues according to which tax is charged (or not charged).
You should not have a Sales Tax Code called “NON” (Non-Taxable), because each non-taxable Sales Tax Code should specify WHY a customer, or an Item is not taxed. An item called NON would not give you enough information when looking at your sales tax liability reports.
Sales Tax Items are about the rate of tax to be charged, and which tax agency collects that tax. You should set up tax items for each individual tax you need to track, along with the rate, and agency to which you pay that tax.
Tax Groups are used when you collect multiple taxes that are paid to SEPARATE tax agencies. So for example, if your county or city charges a combined tax rate for the State, County, and District tax, AND IF you have to separately pay those taxes to the state, county, and district, then you’ll need to create sales tax items for each component of the total tax, and then create a sales tax group that combines all those rates into a single line-item for your sales forms.
Items are used to specify each product or service that you sell. Items are either taxable or non-taxable. When you set up an Item in QuickBooks, you define the name, the type, the Tax Code, and the Tax Item that will be used, by default, when you sell the Item. However, if specified in the customer record, the customer’s Tax Code and Tax Item overrides both the Tax Code and the Tax Item when creating a sale. You can further override the Tax Code and/or Tax Item by manually changing them on a sales receipt or invoice.
Sales Tax Codes
Sales Tax Codes help you track “why” a customer or item is taxable or not. A Sales Tax Code is assigned to each customer as well as to each product or service Item.
If your sales tax agency requires reporting for different types of exempt sales, you should create a separate Sales Tax Code for each non-taxable customer type or item type (e.g., RSR for non-taxable resellers and SRV for non-taxable service items).
Setting up Sales Tax Codes
To set up a new Sales Tax Code, select New from the Sales Tax Code menu at the bottom of the Sales Tax Code List.
Figure 1 Sales Tax Code List
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Using Sales Tax Codes on Sales Forms
If you specify a taxable Sales Tax Code in the Customer Tax Code field on sales forms, QuickBooks will charge sales tax (see Figure 2). If you use a non-taxable Sales Tax Code, QuickBooks will not charge sales tax unless you override the sales tax code (to a taxable code) on one of the lines in the body of the form.
Figure 2 Invoice with taxable items
When you set up a customer record, the Sales Tax Code you enter in the customer record becomes the default in the Customer Tax Code field on sales forms (see Figure 2).
Similarly, when you set up Items, the Sales Tax Code you enter in the Item record becomes the default Tax Code in the body of sales forms (Figure 3).
You can override the Sales Tax Code at the bottom of sales forms (by using the Customer Tax Code drop-down list), or on each line in the body of the Invoice.
Editing the Sales Tax Codes on Items and Customers
Assigning Sales Tax Codes to Items
To assign a default Sales Tax Code to an Item, edit the Item and set the Tax Code field to the tax code that should be used when this item is sold.
Figure 3 Edit the Sales Tax Code on each Item as necessary
Assigning Sales Tax Codes to Customers
To view and edit Sales Tax Codes on customer records, edit the customer and update the tax code and tax item in the Sales Tax Settings tab.
Figure 4 Editing the Sales Tax Information for customers
Note: Jobs follow the sales tax status of their parent Customer, so no sales tax information is shown on the Additional Info tab of a Job record. Jobs show on reports with a colon (:) after the customer name.
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Categorizing Revenue Based on Sales Tax Codes
QuickBooks provides a breakdown of revenue by Sales Tax Code on the Sales TaxRevenue Summaryreport (see Figure 5). To display the report, select Vendors & Payables from the Reports menu and then select Sales Tax Revenue Summary.
Figure 5 Sales Tax Revenue Summary with separate columns for each Sales Tax Code
If your sales tax agency requires a detailed breakdown of tax exempt sales, use Sales Tax Codes to produce the information you need. Use Sales Tax Codes to categorize your sales by the reason you charged, or did not charge, sales tax.
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While sales tax can be tracked in QuickBooks, those who have complicated sales tax situations should consider using Avalara’s Avatax. This product can be added onto QuickBooks or almost any other accounting system to calculate, manage, and file sales tax returns. For more information about Avalara, see www.avalara.com.