How to Manage Sales Tax in QuickBooks Accounting Software

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Before setting up your QuickBooks software, you must first determine your home state sales tax rules since those requirements have a big effect on the set up procedures. For example, does your home state require the tracking of sales tax transactions by customer location or by county? Since every state has its own requirements, I encourage you to discuss this matter with your accountant prior to beginning the setup process. Better yet, have your accountant help you with the setup so you know it’s done right the first time.

Let’s first define the difference between Sales Tax Codes (STC) and Sales Tax Items. Sales Tax Codes serve multiple purposes. For example, a STC describes whether a customer is taxable or not depending on their location or tax exempt status.  If a customer is considered a reseller (they buy your product and resell it to someone else who is the actual end user), then you would define this STC as RSR or some other three digit abbreviation. Another purpose of the STC is to define sales items as taxable or not. For example, most states don’t assess sales tax on services, so a trip charge item may be tagged to a code called SVC for service. The final reason for using sales tax codes is so the user can track revenues and sales tax charged by code for help in preparing a sales tax return.

For Sales Tax Codes, you may even want to further define the non-taxable items by type of customer. For example, since hospitals are usually tax exempt, you may want a code called HOS. Another code might be setup for not-for-profit customers call NFP.

Sales Tax Items (STI) must be set up for all tax rates that must be tracked and reported to taxing authorities.  For example, if your business resides in a state in which you must charge multiple tax rates, then you will need to set up a STI for each rate.

You may also need to utilize Tax Groups with QuickBooks if you are required to collect multiple taxes that are paid to different taxing agencies.  For example, if a municipality charges a combined rate for county and city tax and you are required to remit the taxes to separate taxing agencies.

When using Items within QuickBooks to identify products and/or services that you sell, you should define a default STC and STI for each item so the customer’s invoice is correctly charged sales tax or not.  Furthermore, when setting up a customer, you can define which default STC should be used which will override the item default STC. You can also override the STC manually on the customer invoice for special situations.

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