Sales Tax Automation in QuickBooks Online

Setting up sales tax in QuickBooks Online (QBO) could not be easier.  The most recent update to the program makes the work simple.  QBO finds your state's rate and even connects you to the corresponding Department of Revenue's website right from within the program.  Much of this set-up is automatic.  Of course, in some states, sales tax is far from simple.  This post addresses the most simplest of sales tax setup.  One state, one rate.  

Getting started...

  • Do your products or services require sales tax in your state?
  • What's your sales tax rate(s)?
  • What agencies do you need to pay your sales tax to?
  • How often do you have to make sales tax payments?
  • Where to find these answers....

    The government website for your state. Often you'll find a section that contains detailed information about taxes in the state.  For Florida, click here or for a list of everywhere else, click here.  If you are completely lost after all of the above, contact a professional.  When you collect sales tax, you are their agent.  Sales tax can be complex, confusing and you can be audited.  

    Set up:  Click "tax" in the left toolbar....

    Sales Tax Center:    This is where you...

    1. Manage all your sales tax tasks
    2. Add multiple sales tax rates, including combined rates (details on this to come in a future tutorial)
    3. View sales tax liability reports that you can customize by date, agency​
    4. Record sales tax return and payments in the Sales Tax Center so you can see all your recent payments in one place

    How sales tax works in QuickBooks.....

    It calculate sales tax from the settings you enter in Sales Tax Center. After creating your items that you sell, your first step is to indicate whether all new products and services are taxable. Then, you add your sales tax rates and agencies.

    It adds a sales tax field to your sales forms, like invoices and sales receipts, etc. You can select to have a default sales tax rate item for your customer.  Each time you create a new sales form, it will default to last used or the sales tax rate to use for the customer. You can select another rate, if applicable, for your customer if situations have changed (customer moved to a new state).  

    Be careful with discounts....

    Taxes on discounts can also affect sales tax. If you have to prepare a customer return, make sure you are careful to do it in the current tax period.  Do not void or modify a customer form once sales tax return has been submitted.  Always be diligent to do any modifications in the current period.  If you do void, do so with a credit memo reversing the original entry (if the void happens out of the current month).

    QuickBooks Desktop to QBO conversion warning....

    After the conversion:  There will be at least two sales tax payable accounts on the Chart of Accounts: One for each old Sales Tax Payable account from QuickBooks Desktop.   One for each Sales Tax Agency Payable account in the new QuickBooks Online (set up automatically for each jurisdiction during the conversion).

    You will only use the new Sales Tax Agency Payable account in QBO, and all sales tax will be managed from the Taxes in the left hand navigation tab.  Remember past sales tax payments will convert as regular checks. Any past sales tax adjustments will convert as journal entries.

    Final Thoughts....

    My experience with Intuit and sales tax over the years has been love/hate.  Love when it works, hate when it doesn't.  I remember back in desktop days when an update to the program messed up sales tax functionality for everyone.  Sales tax reporting/collecting, etc. is on the business owner.  I ALWAYS do the math even when the computer calculates it for me.   Just to double-check.  This automated system sounds wonderful but sales tax can be complex.  Intuit is moving in the direction of automation because they purchased a company called Extractor, which is primarily a sales tax compliance company.  Learn the rules that apply to you.  Automation is great when it works, but you cannot hide behind, "that is what the computer told me to pay".  There are penalties and interest if you get it wrong.  Do your homework and learn the rules that apply to your business or hire a professional to help you.

    If you live in a state like New York, with complex state, city, local tax, I highly recommend using the app, Alavara.  Alavara also is a great resource (see their blog) to learn about sales tax and the varying laws throughout the country.  I also have a video/blog post regarding Accounts Receivable best practices.  If you have any questions or would like to see a future video on another topic, please reach out to me on Facebook.

    Lynda Artesani

    Lynda Artesani is the president of Artesani Bookkeeping where she uses her expertise and organizational skills to help her clients thrive and become profitable. Lynda is a member of the Intuit Trainer Writer Network. She is an alumni member of the Intuit Advisory Board. Additionally, she is the first Expert Columnist for the QB Community forum. She is also a co-founder in a Facebook group called QB Community Live!