Why are my nontaxable items (fees & deposits) being taxed when they have been categorized as exempt, but once entered into a customer invoice, its showing as being taxed?
You've reached the right place for help. I'd be happy to take a look into the issue you're having.
I've tried what you've described on my end and once I set up a product or service as exempt, the taxes are still included on the invoice. The reason is that, QBO prioritizes the customer tax settings. For example if customer ABC is set up with taxes included, QBO will automatically add the taxes on an tax exempt product/service. A workaround to this would be manually removing the taxes each time or changing the customer's tax settings instead.
To change the customer's tax settings, click Sales > Customers > select customer in question > Edit > Tax info > Assign default tax rate. Give this a try and let me know how you make out.