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Learn how QuickBooks Online calculates sales tax

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

Take the guesswork out of collecting sales tax. If you charge sales tax 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.

We’re rolling out a new sales tax system for all QuickBooks users. If you use manual sales tax, check if you can now switch over to automated sales tax. If you don’t have the option to switch, don’t worry. It should be available for you soon.

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 sales tax, like churches, schools, and other non-profit organizations.

Here's how to find out if your customer doesn't need to pay sales tax. 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 sales tax rates are the sum of state 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.

sales-tax-overview-calculation_QBO_US_EXT_012220

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. If you don’t have an accountant, we can help find one near you.

Based on your service or product’s tax category

Rules for how to tax a product can change from state to state. Check our blog on how the sales tax of a lemon can change depending on the final product and where it’s sold.

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.

sales-tax-overview-categorization_QBO_US_EXT_012220

Special tax scenarios you should know

QuickBooks calculates your sales tax, even when the rules get a bit complicated. Here are some special tax scenarios you should know.

Sales tax thresholds in your state

Some states have tax thresholds for specific items. For example, clothing items that cost less than $110 are exempt from state tax rate in New York.

Sales surtax in Florida

In Florida, most counties can impose a discretionary sales surtax. If you want to know more about this type of sales tax, visit the Florida Dept. of Revenue’s website.

Hybrid sales tax in California

California’s state, county, and city tax rates are based on where you run your business. These rates stay the same even when you sell or ship to somewhere else in the state. However, the district rate you need to collect changes depending on where you sell or ship in the state.

Get started with automated sales tax

If you haven’t yet, here’s how to get started with automated sales tax. We’ll help you set up where you collect sales tax and file your return when you’re ready.

See automated sales tax in action

  1. When you create an invoice or sales receipt, check the total sales tax at the bottom.
  2. Select See the math or the total tax amount. This opens the "Let’s calculate your tax rate" screen where QuickBooks gives you a detailed breakdown of the sales tax. sales-tax-breakdown_QBO_US_EXT_012420

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