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Learn how QuickBooks Online calculates VAT

by Intuit Updated 1 month ago

Learn how QuickBooks Online automatically calculates VAT when you make a sale.

Take the guesswork out of collecting VAT. If you charge VAT for your products or services, you don't have to worry about calculating each tax rate yourself. QuickBooks can do all that for you. Here's how it works.

How QuickBooks calculates the correct tax rate on each sale

QuickBooks automatically calculates the total tax rate for each sale based on the following:

  • Your customer's tax-exempt status
  • Where you sell and where you ship
  • What you sell

Based on your customer's tax status

Not all customers need to pay VAT, like churches, schools, and other non-profit organisations.

Here's how to find out if your customer doesn't need to pay VAT. Then, you can set up your customer as tax-exempt.

Keep in mind that tax-exempt rules are not the same everywhere. In some places, not all types of products and services can be tax exempt. And sometimes, tax-exempt just means your customer only gets a certain percentage of tax discount.

If this seems a little complicated, don't worry. You just need to map your items to their proper tax categories, and make sure your customer's address is correct on each transaction. Then, QuickBooks follows the correct tax-exempt rules based on what you sell and your customer's address.

Based on where you sell or where you ship

Total VAT rates are the sum of states rates plus local rates (which may include city, county, and/or district rates). You don't have to keep track of all the rates you need to charge. QuickBooks does all that based on the location of sale or the "ship to" address you add in an invoice or receipt.

Note: Some states require sellers to charge tax based on business location, even when you sell or ship to a different address in your state. If your business is in any of those states, don't worry. QuickBooks knows the tax rules, wherever you run your business.

Do you sell out of your state? If your business doesn't have a physical presence in other states, you generally don't need to charge taxes for out-of-state transactions. But if you have an economic nexus in another state, this means you are a remote seller. When you sell to that state, you charge tax rates at the place where your product is going.

Important: Keep in mind that each state has their own take on economic nexus. We know this can get a little complicated. If you're not sure if you have economic nexus in another state, talk to your accountant.

Based on your service or product's tax category

Rules for how to tax a product can change from state to state.

You can assign tax categories to anything you sell. This lets QuickBooks know how much tax you need to charge based on what exactly you're selling.

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