When QB applies an automatic late fee on an invoice it add sales tax to everything including a tax exempt customer and/or items. Is anyone else having this issue?

Welcome to the Community, @lee68. As an insight, QuickBooks Online (QBO) calculates automatic late fees based on the balance due, sales tax, shipping, and discounts. 

This could be the reason QBO charges tax after setting up this item as non-taxable.  

I've got you the steps to stop the system from calculating sales tax when the late fees are added to an invoice. I'd suggest you check first with your state tax authority as to which goods and services are subject to a sales tax to ensure we're compliant with their rules and regulations.

Once verified, uncheck the Tax box on each invoice so the system won't charge a sales tax to your customer. 

Additionally, you can remove a late fee from an invoice. To do this, select the Trash bin icon located on the line of the Product/Service item. 

For future reference, you can run the Sales Tax Liability report to get a detailed look at the taxes you owe and why you owe them. 

I'm always around here to help you more should you have additional concerns about sales taxes. Take care!

Thank you for such a quick response. Is the proper step to uncheck taxable status on each line item on every invoice? That seems like a redundant step. The item is taxable but it is at the customer level where the tax exemption comes in. Once an automatic late fee is assessed it changes the tax exempt status to all taxable. This causes an issue when automatic reminders are sent via QB.

Good evening, @lee68. 

Thanks for reaching back out to the Community. I appreciate you coming back and asking for clarification on this subject. 

Yes, you're on the right track. The proper instructions are to uncheck every item as need be on the invoice. Exactly like my colleague stated. You can also check out these guides below for further insight into some additional steps that may help:

• Automatically applying sales tax to late payment fees even though it is categorized as non-taxable

• Late fees

If you're still unsure of what to do, feel free to ask. Should you need further assistance, just let me know. I want to make sure that you're able to get back on track with your business. Wishing you continued success!

Want to know what’s even crazier than QBO computing sales tax to non-taxable items like late fees???? For them to not tax products that are set up to be taxed…. Via delayed charges linked to recurring invoices. What it does is add the said products to the recurring invoice, act as if it will be taxed (showing you the little green check mark next to it as taxable). Not computing or adding in the tax, showing no amount in the taxable line, and then automatically sends them to the client without charging them tax…. But guess who still has to pay the uncollected sales tax on the delayed charges? The company. These things are bass akwards. 

The late fee populates automatically on every invoice once it goes beyond the due date, but when it populates, it shows the line item taxable.  I had unchecked the product or service non-taxable from the very root, but it continues showing taxable.  Is there a way make sure that when it populates, it does not have the taxable check mark on it?