Set up and use Automated Sales Tax
Sales tax is getting easier! Through the New Automated Sales Tax experience, you just need to answer a few simple questions and QuickBooks Online will know what taxes apply to your business, set them up, and automatically track your sales taxes.
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!
You can also watch this video on how to set up your sales tax real quick:
So... how exactly does Auto Sales Tax work? Here's a quick guide to this feature.
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 Sales tax link on your transaction.
The Automated Sales Tax (AST) center now displays your tax liability in either Accrual or Cash basis accounting. The taxes will be displayed based on the accounting method you have chosen in your company settings.
The new set up flow is very easy for you to go through.
- On the left side tab, select Taxes > Sales tax, then select Set up sales tax.
- 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 Next.
- If it’s not, select the pencil icon then correct it.
- 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.
- 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?
- 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. To set up all other agencies you are registered with, select Add Agency.
- 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).
Previously, the Sales Tax Drawer will only show you the total tax amount due, the tax agencies involved, and the tax categorization of the line items. With the updated Sales Tax Drawer, you can now see line level breakdown of the sales tax due and if needed, make additional edits. If you know your tax rates, you can even override sales tax amount.
To access the Sales Tax Drawer from your invoice, select the Sales tax link in the lower right.
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.
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.
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 shipping address is completely blank, sales tax calculation will depend on YOUR Company Address in QuickBooks until you are able to provide the buyer's correct shipping address. 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.
Many companies have multiple business locations where they sell and/or ship products from. The Sales Tax feature can support you on sales tax calculation based on a different business address.
On your sales transaction forms (invoices, estimates, and sales receipts), you will either see a Shipping From or a Location of Sale field prepopulated by your company address:
- If customer’s Shipping address is recorded, you will see a Shipping From field and
- If not, you will see a Location of Sale field
Note: These fields can also be found and modified by clicking the Sales Tax link on the bottom right of the transaction.
If you are using Automated Sales Tax: QuickBooks automatically calculates tax for shipping charge based on the rate in your state/area.
If you are using the Sales Tax Center: The Shipping charge field on sales transactions doesn't provide a field to mark it as taxable and QuickBooks will NOT automatically calculate tax for shipping. To work around this, you need to create a product/service item for taxable shipping charges and use it on your sales transactions.
- Create the taxable shipping charge item.
- Select the Gear icon at the top, then Products and Services.
- In the Products and Services window, select the New button.
- Select Non-Inventory or Service for the product type.
- Leave the sales price/rate field blank.
- Select the appropriate Income account and check the Is taxable box.
- Select Save and close.
- Add the shipping charge as a line item on your sales transaction and select Tax to apply tax.
Important: If you are going to use shipping charges as a Product/Service line item in order to add tax, make sure to leave the Shipping field blank so there is no duplication. The customary Shipping field will not appear on sales transactions if emailed or printed when the field is left blank.
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:
- From the left menu, select Taxes > Sales tax, then select Sales tax settings.
- From the Edit drop-down under the Action column, select Make inactive .
- On the window that pops up, select the Make Inactive button.
To make an inactive agency active again:
- From the left menu, select Taxes > Sales tax, then select Sales tax settings.
- Select the gear icon at the top right of the table, then put a checkmark on the Include inactive box.
- From the list, find the agency and select Make active.
Tax categories help you track and calculate sales tax more accurately. For more info, find out how to add sales tax categories to your items.
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.
The new Sales Tax Center lets you make sales tax adjustments with just a few clicks.
- Select the View Return button next to the tax you need to adjust. This will open the Return summary screen.
- Select Add an adjustment.
- From the drop-down, choose the appropriate Reason.
- Select the account to apply the adjustment to.
- Add the amount of the adjustment.
- When you're happy with the amounts listed on the summary, select Add. This allows you to enter the payment amount, date, and account for the payment to be applied to this particular return.
- Review the final summary, then close the window. This will remove the return screen and add it to the History tab.
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 user 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.
You can also watch our quick video on Collecting and Recording Sales tax.
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