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Refund sales tax collected from tax exempt customers

SOLVED•by QuickBooks•1•Updated over 1 year ago

You may be required to collect taxes for certain goods and services you offer. QuickBooks Desktop helps you keep an accurate record of these taxes so you can easily monitor and remit them to the appropriate tax collecting agency.

This article is part of a series on Sales Tax. It covers the usual sales tax workflow in QuickBooks Desktop.

It also helps you complete other sales tax-related tasks.

If you encounter problems while working on your sales tax, see Resolve common sales tax issues.

If you have inadvertently charged sales tax for a tax exempt customer, you can process a refund for them using one of the options outlined below. Contact your accounting professional to know which option works best for your business.

  1. Create a credit memo.
    1. From the Customers menu, click Create Credit Memos/Refunds.
    2. Enter required information. Note that the credit memo must match the original invoice items and quantity (including the sales tax amount).
    3. Enter current date.
    4. Select Save & Close.
  2. Create a new invoice.
    1. From the Customers menu, click Create Invoices.
    2. Enter required information. The new invoice should match the original invoice for the same items but mark them Non-Taxable using today's date.
  3. Select Receive Payments window and apply the existing credit to the invoice.

This will leave a credit balance for only the amount of the sale tax that can be applied to a future invoice or refunded via check.


Additionally, the Tax Agency Report will show taxable sales reduced by the amount of the credit memo and the non-taxable sales increased by the amount of the corrected invoice.

On the original invoice, change the item from Taxable to Non-Taxable. This will reduce sales tax amount. Customer Payment screen will show an overpayment. You can process a refund or create a credit for this.

  1. From the Customers menu, click Create Credit Memos/Refunds.
  2. In the credit memo, enter the item and quantity you sold and make it Taxable.
  3. Enter the item you sold again but enter a negative number for the quantity and make it Non-Taxable.

This option requires that you know your Sales Tax up to the point when you started tracking Sales Tax accurately. You can get this from the Tax Agency report.

  1. Select Sales Tax then Adjust Sales Tax Due.
  2. In the Sales Tax Adjustment window, set the Adjustment Date to the date where you want to start tracking sales tax.
  3. From the Tax Agency drop-down, choose the sales tax agency you pay sales tax to.
  4. Set the Adjustment Account. Note that it should be an Expense account as you will be reducing sales tax.
  5. In the Adjustment box, make sure Decrease Sales Tax Line is selected, then enter the amount of Sales Tax to be adjusted. (This will be the value you have from the Tax Agency report.)
  6. In the Memo field, enter a note about the adjustment. Example: Adjustment to zero out the sales tax.
  7. Select OK to finish.
  8. Pay sales tax.
    1. From the Sales Tax menu, select File Sales Tax.
    2. From the Tax Agency drop-down, choose the correct tax agency.
    3. The Total Tax Due balance should be zero as the Sales Tax Due and Sales Tax Adjustment zero out each other.
    4. Select File Return.
    5. Check your Tax Agency Report and the sales tax up to that point will now be zero.

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