Why does QBO add sales tax to tax exempt customers?

it should not, but I have heard of it happening.  Be sure to set the customer record to non tax, and select that for each item too, that will prevent what appears to be a bug

Yup, that's what I'm doing now.  As my business grows it gets tricky to remember which customers are taxable and which are not.  It's becoming a problem.  And I'm wondering how that's manifesting itself in the sales tax report, especially as it related to prepaid taxes that are refundable that must be taken into account in the sales taxes due for the monthly or quarterly payment.

Thanks for coming back to us, @dancmatthews.

I have some information about the incorrect data on your sales tax report. Aside from making your customer profile exempy, you'll also have to set your products and services as non-taxable in their category, and mark the Tax column when creating an invoice. This way, your sales tax liability report will have the right info.

To set up a nontaxable category items:

1.  Go to the Gear icon at the top.
2. Select Products and services.
3. Edit the item in question and make sure that the Sales tax category drop-down is Nontaxable. 
4. Click Save.

After changing the sales tax category, mark the Tax column on invoices. See the attached images below for your reference.

If you've already verified the above mentioned and you're still getting the same result, please contact our QuickBooks Customer Care Support so we can investigate further and create a case for you.

Here's how to reach out:

1. Go to the Help icon.
2. Click Contact Us.
3. Type in your concern in the dialogue box. Hit Let's talk.
4. You can either choose Start messaging or Get a Callback to get a representative.
5. Snap the Confirm my call button.

In case you need help with other tax tasks, click this link to go to our general tax topics with articles.

Let me know if you still have questions or concerns. I'll be around to assist you every step of the way. Take care and have a good one.

Shiella-

Your response is inaccurate or you misunderstand the problem. We are having the same issue as well.

We have wholesale customers and retail customers. The items should always be taxable as a default - but certain customers are tax exempt. We have the tax-exempt option selected for certain customers - and yet sometime (but not always) tax is being added to the transaction. There appears to be no pattern to the flaw. Sometimes it works. Sometimes it does not.

This seems like a fairly straight forward glitch in the system. I am surprised Quickbooks has not addressed this.

BTW - it seems to happen more frequently on the IPAD based app then when acessing creating it in a browser.

Additionally, we have customizations for our Invoices, however some of our customizations do not appear on invoices if they are created on the ipad.

I would say iPad app is very buggy and likely the culprit for all of these bugs.

We have the same problem with invoices created in the App. It appears to work most of the time when working from the main web interface. Annoyingly, virtually every intuit response I have read for this problem says essentially exactly the same thing - "You must make the item tax-exempt". This is a pointless and thoughtless response from Intuit and completely fails to address the root problem.

It is NOT a question of the item not being subject to tax, it absolutely IS subject to tax! Some customers, however, carry resale exemptions which means we don't have to collect sales tax of sales to them. It is not an ITEM based decision but a customer based decision. Hence setting the CUSTOMER as tax exempt. If I make the item non taxable, then NOBODY will pay tax.

Frustratingly, Intuit seems uninterested in fixing it as it has been on-going since at least 2019.

This is not the impression we want you to experience when using the sales tax feature, User25. 

We can set up an item as nontaxable to be used when you don't want to tax the customer. Once you have set up your Sales tax, you have the option to set a sales tax category for each item. Then, every time you use it when creating a transaction, it'll automatically be nontaxable. Here's how:

1. Go to Sales on the left side menu. 
2. Select Product and Services. 
3. Tap New, then choose the type of item you need to add. If you need to update an existing item instead, find the item then select Edit.
4. Scroll down to the Product/Service information screen. Select Nontaxable under the Sales Tax category field.
5. Click Save and close. 

For more details on managing your sales tax and how we calculate it, you can check out the Set up and use automated sales tax in QuickBooks Online article. For your future references, you can also use custom rates to manually calculate taxes on invoices or receipts.

Feel free to visit our Sales tax page for more insights about managing your sales tax in QuickBooks.

The Community is always available to help you with any questions you have with QuickBooks. You take care and have a great day ahead!

Thank you very much for your prompt reply, however you are still not understanding the problem. We sell items both retail and wholesale. Let me walk you through an example. 

Suppose I want to sell chocolate bars in my shop. Most of my customers that come in to my store are retail customers so I must apply sales tax to the transaction because it is like any other retail transaction. Therefor when I set up the item in Quickbooks, the item MUST be set be set up as a taxable item. If it is not set up as a taxable item, Quickbooks will not add sales tax to the transaction. This all works normally.

Next, suppose one of my customers thinks my prices are SO good that they want to buy chocolate bars from me to sell in their own shop. The customer gives me with their resale certificate and I mark the CUSTOMER as "Tax Exempt" in the check box in the Quickbooks Customer set up. Quickbooks even provides me a drop down box in the customer sales tax field where I can select a reason for the tax exemption (resale) AND a field that I can put their resale number into.

So after i set my customer up as "Tax Exempt" Presumably when I create an invoice for this particular customer, they will NOT be charged sales tax.

When i create an invoice using the Quickbooks APP, this DOES NOT HAPPEN. My "tax exempt" customer is getting charged sales tax. It even appears that QB knows this is a problem because the app prompts me to "double check" the sales tax rate. I know that it can work properly because if I create the invoice in the web browser, it correctly removes the taxes every time. 

It is very simple - THERE IS A BUG IN THE QUICKBOOKS APP that is preventing the "Tax Exempt" customer option from doing its job. I do not want to have to create duplicate items with one taxable and one tax exempt and have my staff have to figure out which one to use. I don't want to have to check every time to see if a particular customer is tax exempt. Quickbooks offers this functionality, but it simply does NOT work in the app. 

I understand the frustration you're experiencing right now, User25.

Allow me to provide additional insight about the tax-exempt issue on the app. Please know that we no longer provide troubleshooting solutions for the app version of QuickBooks.

The QuickBooks Online Windows and Mac desktop apps are no longer supported since April 20, 2021. Please refer to this link for additional information: Support and software updates.

In addition to this, any functionality issues on the app can be fixed by accessing your account on a web browser. You can browse this article to learn what computer and browser to use: System requirements for QuickBooks Online, Accountant, and QuickBooks Self-Employed.

For the sales tax, when a customer is marked Tax Exempt it doesn't always mean they are exempt from all tax implications. To be eligible for the tax-exempt, the product or service should correspond to the jurisdiction of the exemption. 

Furthermore, in some areas, if you're tax-exempt, it means you only get a certain % discount from taxes like 50% and not a full 100%. Also, if items aren't mapped correctly to the eligible tax code, it would exempt the customer.

To prevent that, you can edit the item and ensure it's set up correctly with the appropriate tax mapping. Doing this will make the customer eligible for the exemption. 

Additionally, if the customer has no address or has an invalid address, QuickBooks will use the default tax rate for the company. It'll still disregard even if the customer is tax-exempt.

The customer needs to have the correct shipping address. As part of the update, the system will use the company address and calculates the tax exemption off of that address, not just the default tax. It ensures that if the customer has an incorrect address, then we'll make a secondary check to get the taxes right. 

Lastly, if you still feel the customer should be exempt from collecting a tax, you can always override the amount calculated at the bottom of the invoice by selecting that. 

Please be aware that this can cause undesired side effects as if that customer should be taxed. Then, they could face penalties and fees from the state for not collecting tax on their sales transaction. Learn more on how QuickBooks makes each sales tax calculation accurate.

If you need to report this to our Product Team, you can share your concerns or ideas via the in-product Feedback tool. Simply click the Gear icon in the upper right-hand corner of the Dashboard screen and click on Feedback.

Stay in touch with me if you have other concerns aside from fixing the error. I'll be right here to help you.

I use the online version of QBO.  In August 2021 the tax exempt customer was treated correctly. In September the items that are taxable to non-exempt customers show a "T" next to the amounts, although no tax is calculated.  This is embarrassing.  How do we remove the T that wasn't there last month?  As an aside, I copied last month's invoice - it shows the "T."  I created an invoice from scratch - same result.  I will continue looking for an answer in QBO but in the meantime we will need to manipulate each .pdf invoice to get rid of the extraneous "T" designations.  Not the best use of our time. 

Thank you for joining the thread, @carolkory. I'll take care of this concern for you. 

I replicated the situation you stated above using a test account. The screenshots below are for a tax-exempt customer with a non-taxable product:

As you can see on the preview page, there's still a T right after the amount on the invoice. Removing this from the preview page is currently unavailable. Your customers will still see that the total tax for that specific transaction won't have any taxes at the bottom part of the PDF you send them.

If you need to have an account summary show on your sent invoices, check out this article for the steps: Add an account summary to an invoice in QuickBooks Online. 

Post a reply if you have other questions about invoices in QBO. I'll get back to you as soon as I can. Have a nice day!

I don't understand how you don't understand what User25 is asking.

I work for a stone and tile retail store, and we sell thousands and thousands of products.  We have contractors and designers that are tax exempt, and are marked properly in their customer profile.  However, everytime we invoice them, they are charged sales tax (using web based QBO).  There is no way we can duplicate every single product (we currently have over 50,000) to show one with Tax and one without.  Setting up the customer as tax exempt should be sufficient.  We shouldn't have to remember which customer is tax exempt and which isn't.  QBO should be doing that work for us. (Hence the reason we pay for it)

It has gotten to the point where QBO doesn't even do the basic bookkeeping for us.  It's extremely frustrating, and has us looking for an alternative.  I used other accounting programs for over 30 years and NEVER had these ridiculous issues.  Just wish business owner's realized that QB's targets them with bells & whistles, but shorts them on several basic accounting functions.

March of 22... Problem persists.. following to see if it ever gets sorted out.... :(

Westfield AV

I have the same issue with sales tax EXCEPT I never use the app bc it's crap. I am online only on a PC. I am a bookkeeping firm and produce invoices from several different companies who sell wholesale AND retail. I am consistently receiving emails regarding invoices being sent with sales tax added but the customer is non-taxable AND the "this customer is taxable" box is NOT checked. This has happened for years with no fix whatsoever. WHAT. IS. THE. DEAL. QUICKBOOKS ONLINE???

Super unprofessional.

03.25.22

This isn't the kind of service we want you to experience in the sales tax feature, spytekbookkeeping.

I understand the impact of this behavior on your transactions. Ensure to uncheck the tax column when creating transactions.

In the meantime, I encourage you to contact our QuickBooks Online Support Team so they can further investigate your concern and have an immediate fix.

Here's how you can contact live support: 
 

1. Sign in to your QuickBooks Online company.
2. Select Help (question mark icon) at the top right.
3. Select Contact us to connect with a live support agent.

Additionally, I've included you'll want to check these articles to learn more about sales tax:
 

• Learn how QuickBooks Online calculates sales tax
• Refund sales tax

I'm only a few clicks away if you need assistance with your other QuickBooks tasks. It's always my pleasure to help you out again.

We recently had one of our offices report an issue with tax being charged on tax exempt customers. In troubleshooting we determined that in this case at least the cause seems to be the tax exempt reason the customer has selected. One customer set as exempt was set as "Religious Organization" and when we changed it to "Resale" QBO stopped applying sales tax. We used the same items on both invoices.

This seems like a pretty major bug with QBO and it's disappointing to see replies in this thread dating back over two years and no true solution being offered. We hope to see this resolved in the near future.

I have worked with QBOA for many years. I am fully aware of customer support options. There is no fix ATM that anyone can advise on.

Thank you

MORE SALES TAX ISSUES:

Since the update QBO has made to New Customer Set Up, "this customer is taxable" now must ALWAYS be manually checked for all new customers added even though, under Sales Tax Settings, the box "Mark all new customers as taxable" is checked.

This is for all my clients who charge sales tax. Nothing to do with cache, browser, etc

One of my clients has already called me to complain. NOT COOL.

This needs fixing immediately. 

Is there a general consensus to this tax mess?  Provided there are no current bugs or hiccups in the QBO sales tax platform... can someone please verify if this procedure I'm using for sales tax is correct ?  

I understand all customers need to be classified as taxable (for customers being charged sales tax) or NOT taxed (for customers exempt from being charged sales tax). 

My company is in Ohio.  

SHIP TO AN OHIO ADDRESS: On an item that is taxable first, the customer needs to be classified as taxed. Then, invoice needs to show a check mark on the tax box indicating the need to charge sales tax on that item. Third, at the bottom the tax rate should be "based on location"  correct?  

SHIP TO OUT of STATE ADDRESS:  Same example but my taxable item is going to be sold out of state. First, classify customer as exempt/not taxable.  Then, on the invoice the tax box needs to be blank (no check mark) bc sale is out of state.  Third, at the bottom the tax rate should be "based on location" since the shipping address is out of state, correct?   Or should I select the sales tax rate as "non taxable sales" since the sale is not taxable out of Ohio? 

Also, I agree that having two sets of items (one taxable and one non taxable) is ridiculous and hope that is not the answer to the sales tax hiccups.  

Thanks for the help!

Thank you for posting your query here in the Community, @Qlil.

I've come to share information about how QuickBooks calculates sales taxes.

QuickBooks automatically calculates the total tax rate for each sale based on your customer's tax-exempt status, where you sell, where you ship, and what you sell.

Based on your example of shipping an item to an Ohio address, it's correct. Please know that states require sellers to charge tax based on business location, even when you sell or ship to a different address in your state. QuickBooks knows the tax rules, wherever you run your business.

On the other hand, you just need to remove the checkmark from the Tax box when selling items out of your state address. By doing this, QuickBooks won't calculate sales taxes even without selecting the sales tax rate as non-taxable. 

Also, you'll want to know that you don't need to charge taxes for out-of-state transactions unless you have an economic nexus in another state. In case you charge tax rates outside your state, we recommend seeking help from your accountant since it's a little complicated.

I'm adding this article to learn more about how QuickBooks calculates sales tax: How QuickBooks Online calculates sales tax.

Come back to this post if you need clarification about this, @Qlil. I'll be around to provide further assistance.

When it's time to file your sales tax return and record your tax payment, you can check out this article for the detailed steps and information: File your sales tax return and record sales tax payments in QuickBooks Online.

Have a good one.

Thank you Mark_R for your reply.

In order to make sure sales taxes are calculated correctly do all customers need to be set up as taxable (for customers being charged sales tax) or NOT taxed (for customers exempt from being charged sales tax)?   Is this info required in making sure sales taxes are calculated correctly?

When we sell light bulb A101 from our product list, it is considered a taxable item. When sold in Ohio we charge sales tax.  When sold & shipped to someone in Kansas we do not charge sales tax.  Should it be set up in our product/item list twice? (see examples)  

Example 1:  Light Bulb A101 (taxable) bc this product is a taxable item

Example 2:  Light Bulb A101 (taxable) for invoices in Ohio

                      Light Bulb A101 (nontaxable) for invoices out of state

On an invoice to Kansas does light bulb A101 need to be set up in our items as a nontaxable to calculate sales tax correctly on an invoice? 

Or can we just have item light bulb A101 in our items (set up as taxable) and on the invoice leave the tax box blank - not checked? 

Again thank you for the help.  

Thank you for your prompt reply, @Qlil.

I’m here to assist you further and clarify information when setting up products/services in QuickBooks Online (QBO).

Yes, you’re right with all the information you mentioned above. 

Setting up your customers as taxable (for taxable customers) and/or Not Taxed (for tax-exempt customers) will help ensure that sales taxes are calculated correctly. 

Also, you don’t have to set up your product/service item twice (one for taxable and one for non-taxable). You can set up one with taxable and uncheck the column under Tax when adding this product for tax-exempt customers.

Nonetheless, you’re correct about leaving the tax column blank or unchecked when adding these services to your invoices to Kansas.

Moreover, don't forget to consult your accountant to ensure that you're guided with setting up taxes and ensure your books are accurate.

Check out these articles for more details about managing sales tax:

• Sales tax
• Set up and use automated sales tax

If further assistance is needed with taxes, you can always press the Reply button to add them here. Have a good one!

RoseJillB you helped clear up my questions on items and sales tax so I want to thank you!

I do have another question on invoices that include both taxable and nontaxable - they are more complicated and Im not sure what type of tax to set up??   Customer XYZ  in Ohio and customer ABC Out of State.  

Example A:  We sell products that are taxable to customer XYZ  in Ohio.  We also offer professional services (consulting so no tax) to the same XYZ customer in Ohio.   How should we set up customer XYZ since they are buying both taxable products and professional services - not taxed?  On the invoice to XYZ if we have both professional services and products being invoiced, what tax rate should we select?  1) "based on location" or 2) "Non Taxable Sales"?

Example B:  We sell products to a customer ABC in Kansas so they are not taxed.  We also offer professional services (consulting so no tax) to the same ABC customer in Kansas.   I set up customer ABC as tax exempt since they are buying non taxable products and the professional services are not taxed. Is this correct?  On the invoice to ABC if we have both professional services (no tax box selected) and products (no tax box selected), what tax rate should we select if they are an out of state customer?  1) "based on location" or 2) "Non Taxable Sales"? Just FYI, I do have the professional services item set up in QBO as non taxable but when creating an invoice to customer ABC it wants to still charge sales tax on professional services. 

Sometimes on sales tax reports there is a unspecified or out of scope that shows up.  I'm not sure if it has to do with the way the customer is set up or the tax rate selected on the invoice?