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Set up and use Automated Sales Tax

Sales tax is getting easier! Through the New Automated Sales Tax experience, you just need to answer few simple questions and QuickBooks Online will know what taxes apply to your business, set them up, and automatically track your sales taxes.

This means you no longer need to select a tax rate when you create an invoice or other transaction. As long as your Sales Tax Center and all applicable tax agencies are set up, the system will automatically do it for you!

So... how exactly does Auto Sales Tax work? Here's a quick guide to this feature.


  • You set your accounting method to Cash AFTER setting up the Sales Tax Center, QuickBooks will still automatically calculate your sales tax but your Sales Tax Center will still display based on accrual method. As a workaround, you can use Sales Tax Liability reports to determine the proper Sales Tax payments recorded in QuickBooks Online.
  • You set your accounting method to Cash BEFORE setting up your Sales Tax Center, you will be defaulted to manual sales tax. In this case, you may want to start a new QBO account/company file then set up the Sales Tax Center prior to setting your accounting method.

How QuickBooks Online calculates sales tax

The new sales tax feature looks at a variety of information to calculate your sales tax.

  • The state where you have nexus and are registered to collect sales tax
  • The physical address of your business
  • The physical address on the sales receipt or invoice
  • The product mapping you have associated with the products or services you are selling
  • The exemption status of your customer

NOTE: If you want to see a breakdown of taxes that were calculated, select the Sale tax link on your transaction.

Set up automated sales tax

The new set up flow is very easy for you to go through.

  1. On the left side tab, select Taxes > Set up sales tax.
  2. You'll be asked to verify your address. Remember, we are basing tax calculations on this address so it's important that it is correct.
    • If it's correct, select Looks good.
    • If it’s not, select the pencil icon then correct it.
  3. Next, you'll be asked if you are required to collect taxes outside of your home state; this helps us determine the tax agencies to set up.
    • Select No or Yes.
  4. If you're only required to collect tax in your home state, we'll ask you to give us a little more information:
    • When did your current tax period start?
    • How often do you have to file your sales tax returns?
    • When did you start collection tax for this agency?
  5. If you need to collect taxes in multiple states (for example, if you ship products to many locations like Amazon sellers do), you'll need to give us information for the other agencies you pay. Your home state agency will already be listed.
    • Select Add Agency to set up all other agencies you are registered with.
  6. Finally, we will work on calculating tax rates and setting up agencies. You'll see a screen confirming that your setup is complete.
    • Select Got it and you'll be taken to the sales tax page.

NOTE: When Auto Sales Tax is enabled, you'll see a Permit no. field on your checks and other expense transactions. There is currently no way to turn off or remove the field. If you don't want to see it on your transactions, send us a message (Gear > Feedback).

Sell to customers in different states

When your customers are located in other states – a common situation for e-commerce and online business owners, your tax situation will vary depending on what state you are located and where you are selling. We advise you to contact your state tax authority, or your accountant, to get information for your specific situation. The general rules are as follow:

  • If you don’t have a presence in a state, then you are not required to collect sales taxes.
  • Every state defines sales tax rules differently. Check with your local tax authority for clarification if you have questions.
  • If you create a transaction for a state that you haven't yet set up, you'll get a message advising you to go to your sales tax settings to add the tax agency.

Retail stores in various states

If your company has retail stores in two or more states, each store may have a different sales tax rate. If you simply need to record your daily sale, you can create a customer for each state and use the retail store address as the billing/shipping address. This ensures that correct sales tax is used.

Add a buyer’s address

Adding a shipping address in the buyer's profile within QuickBooks will allow sales tax to calculate as accurately as possible. However, we know that this information is not always available while creating transactions. If the billing and shipping address are completely blank, sales tax calculation will depend on YOUR Company Address in QuickBooks until you are able to provide the buyer's correct billing or shipping address. (If the customer's name is populated in the billing address field, you may need to remove it) You will receive a message on the top of your transaction reminding you that adding the shipping address will provide the most accurate tax calculation.

Make a tax agency active/inactive

Sometimes you will have sales tax agencies listed that you no longer use and want to make inactive or others that are inactive you would like to use again. Please follow the steps below to make a sales tax agency inactive or active.

To make an existing agency inactive:

  1. Open the Edit setting screen (Taxes > Sales tax settings).
  2. On the table, go to the Action column and from the Edit drop-down, select Make inactive.
  3. On the window that pops up, select the Make Inactive button.

To make an inactive agency active again:

  1. Open the Edit setting screen (Taxes > Sales tax settings).
  2. Select the gear icon at the top right of the table then put a check mark on the Include inactive box.
  3. From the list, find the agency and select Make active.

Mapping products and services to tax categories

The new Automated Sales Tax experience gives you the ability to map a new or existing product/service item (Inventory, Non-inventory and Service) to the correct tax category. This ensures that QuickBooks Online is calculating sales tax as accurately as possible, based on both the location of you and your customer AND the product category.

To assign a tax category to product:

  1. When creating or editing an item, check the Is taxable box for items that should be taxed.
  2. From the Sales tax category drop-down, select the category that best fits your item. Example: Food and Drink
  3. From the What you sell drop-down, select the more detailed item category. Example: Soft Drinks Water, Beer
  4. Save your work.

If you find that the product category has been set up incorrectly, you can edit the category at any time. You can also make the item non-taxable if you find no tax should be calculated or tracked on this item.

Sales tax exemption

While you should check with your individual state tax authority as to which goods and services sold in your state are subject to sales tax, generally you are not required to collect sales tax for the following transactions:

  • Resold items: Retailers don’t typically have to pay sales tax on wholesale purchases since it’s assumed that the end consumer will pay sales tax on these items at the point of purchase. Note: In this situation the customer should present the buyer with a copy of their exemption certificate that is issued by the state which the product is being shipped. Multi-state exemption certificates by and large are being rejected by most states with the requirement the buyer be issued a singular state exemption certificate.
  • Raw materials: If you produce and sell goods that will be the raw material for other goods, these items are typically considered sales tax exempt in most states. This is commonly known as an Industrial Production/Manufacturing exemption.
  • Non-profits: Sales made to non-profit organizations are normally exempt from sales tax.If you are involved in these types of transactions, you’ll need to get a copy of the buyer’s tax-exempt certificate or number (issued by the state they are in).
  • Other type of exemption certificates: Federal Government, State Government, Local Government, Tribal Government, Charitable Organization (aka Non-Profit), Religious Organization, Educational Organization, Hospital, Resale, Direct Pay Permit (this is where the buyer will not pay you the tax but will remit it directly to the state themselves, this is not technically an exemption), Direct Mail, Agricultural Production, Industrial Production/Manufacturing and Foreign Diplomat.

Important: In setting up exemptions in the system, you need to make sure you are selecting the correct exemption type for your customer. For instance, in AZ, having a “federal” exemption does not mean goods or services sold to a customer will be 100% tax exempt, but rather AZ only allows a percentage of sales tax to be discounted. There are several states that do not allow certain types of exemptions (educational, hospital, etc.) or only allow a percentage to be discounted rather than all of the tax be 100% exempt. The type of exemption your customer has should be clear on the certificate they provide to you.

To make a customer tax exempt, select the checkbox next to This customer is exempt.

Sales tax adjustment

The new Sales Tax Center lets you make sales tax adjustments with just a few clicks.

  1. Select the Start Return button next to the tax you need to adjust. This will open the Return summary screen.
  2. From the drop-down menu, choose the reason for adjustment.
  3. Select the account to apply the adjustment from a drop-down menu that will change based on the reason selected.
  4. Add the amount of the adjustment.
  5. When you're happy with the amounts listed on the summary, select Record payment. This allows you to enter the payment amount, date and account for the payment to be applied to this particular return.
  6. Review the final summary then close the window. This will remove the return screen and add it to the History tab.

Special tax scenarios

Quickbooks Online Automated Sales Tax is equipped to handle several special tax scenarios. Below are a few common examples:

Items that are marked "non-taxable" by the use but should be taxed in certain states/circumstances

In certain cases, QuickBooks Online may still recommend a tax amount when an item is non-taxable. Example: An item that is non-taxable everywhere except when a customer address falls into a specific Zip code/address. In this case, you'll see the tax applied and the special details indicated on the sales transaction.

Track tax items with thresholds

QuickBooks keeps track of tax thresholds on specific items based on the tax law for the location. Example: NY Clothing Threshold: Currently, clothing sold in NY that is less than $110 per item (or pair) are exempt from the NY State 4% sales tax, the local tax in localities that provide this exemption and the 3/8% MCTD tax within the exempt localities in the MCTD.

“Max Tax” rule for Florida transactions in the amount of $5k or higher

FL has a Discretionary Sales Surtax that is in addition to the FL State sales and use tax. Individual counties may impose the sales surtax (also called a local option county sales tax) at their discretion. Not all counties impose this surtax. However, there is a limit. A Discretionary Sales Surtax is applicable only to the first $5,000 of the sales amount for the sale, use, lease, rental or license to use any item of TPP (Tangible Personal Property being defined as personal property that you can see, weigh, measure or touch; or that is any manner perceptible to the senses, including electricity) This $5000 cap does not apply to rentals of real property, transient rentals or services.

Need additional help? See our additional resources for migrating to Auto Sales Tax and navigating the Sales Tax Center.