What is the correct procedure to record a customer deposit (or prepayment towards an invoice) for a cash based business in order to correctly record sales tax?

Upfront prepayments are income for a cash basis entity, one that is not allowed to carry liability.

Prepayments that are taxable when you get them are also taxable when put on a credit memo to apply them (creates a negative sale and reversal of tax). Or, it is Not Taxed when you get it and Not Taxed when you use it to apply to the actual sale.

Putting it on a Sales Receipt = the date of this sale, just like any sale you report for Sales and sales taxes.

not sure if you are still working on this problem...

the way you set up the pre-payment item determines whether the tax is applied to that item.

Think of it like you are selling your services on a tax-exempt basis for customer deposits. Mark the item as tax exempt (either in the set up of the item or on each line item on the sales receipt/invoice). Double check with the local sales tax authority to make sure that they don't require you to collect sales tax on deposits.

and the date it gets recorded is the date you use on the transaction.

If you use a sales receipt for the deposit, it occurs on that date. Then if you use an invoice for the delivery of services, that date determines when the tax is payable (assuming the following set up)

Dec 10/2018: Sales Receipt for deposit

$500 Tax Exempt, Item = "Customer Deposits" (income account should be a balance sheet account)

July 19/2018: Invoice for services rendered:

$2500 + State Tax = 5% Item= "Photo Services"

-500 tax Exempt, Item = Customer Deposits

Balance Owing From Customer: $2,125 (=$2,625 - $500)

Taxes Payable on July 19: 5% x $2,500 = $625

I work with other photographers and they sometimes recognize revenue on the first $500 in the year they collect the deposit because they consider it non-refundable. If you were to follow that same policy, then you definitely need to check with the tax authority to see if what I listed here is appropriate because it's probably not.

According to each state it can vary, but in CA sales tax is only due when the product is delivered. The customer deposit item should not have any sales tax code associated with it at all.  When you invoice the customer for the sales the tax it is calculated on the item being sold and not impacted by the item deduction for the deposit paid when it was ordered.

Jeanette R.

Income for sales tax purposes is ALWAYS reported in accrual basis, so it's irrelevant if you're cash basis.

Now, in your case, Since it is merely a deposit and not yet invoiced there's no sales tax due. So what you need to do is:

A. Create a Sales Order

B. Only use the following method to record customer deposits:

1. Use the "Make Deposits" screen to record deposits and make sure you choose your Customer deposit account (Liability) OR;

2. Use Journal entry: Debit Cash, Credit Customer Deposit Account (Liability)

What this will do is increase your liability and cash account, but it will not affect your income nor the "Sales Tax Liability" and "Sales Tax Revenue Summary" report. That means you are not declaring it as income and so you don't owe any sales tax. What a lot of people keep on forgetting is; that there's this "Sales Tax Liability" report in QB under the Vendor menu. If you get audited and they know that you are using qb, this is one of the reports the Auditor will request from you. 

Therefore, NEVER use the "Enter Sales Receipt" screen/template to record your customer deposit.  Although it is true that it will not show as income in your Profit and Loss Statement, it will certainly show as Sales income under the "Sales Tax Liability" report. This is what I've learned from programming my client's QB in the past 15 years. 

I hope this helps. Good luck!

www.theaccountantsgroup.com

Your answer is the BEST.   After entering deposits as sales receipts in a prior month, then sold the item in the next month.  It shows up on my Sales Tax report as Non taxable sales. In reading all the other help answers yours is the only logical one to use.  Because in TN it is not a sale yet, just a deposit. But after thinking it thru with my co-worker she had the same answer as you.  There is no way to enter this as Sales receipts or invoice even if you enter NON taxable QB records it as a sale.  THANK YOU so much!  Now to do some clean up.

I have a invitation business and cannot figure out how to record a deposit so that I am paying the correct sales tax.  Do I have to pay sales tax on upfront deposit? 2nd question is, should I be showing the deposit as a taxable or non-taxable amount on the final invoice (a negative amount)? The deposit and final invoice typically happen over a course of 3 months.  

I’m in this same position right now and I don’t quite understand what you did to fix this. Could you elaborate? Thanks!