QuickBooks Online 2023 sales tax set up, get ready to start moving on up with QuickBooks Online 2023. Here we are in our get Greg guitars practice file we set up in a prior presentation using the 30 day free trial.
We also have the free QuickBooks Online test drive sample company open. If you want these two things open at the same time, we suggest using the Incognito window or another browser.
If using Google Chrome, you can find the Incognito by selecting the three dots and choosing the new incognito window and then typing in QuickBooks Online test drive to find the sample company,
we will be using the sample company to compare and contrast the accounting view, the view that get great guitars will be in indicated or can’t be seen. With the items on the left and the business view,
the view that the sample company will be in, you can toggle back and forth between the two of us by selecting the cog drop down and switch back and forth between accounting and business here. In prior presentations, we set up the company file,
we looked at some of the Preferences under the cog button up top, we looked at our chart of accounts, we are entering the beginning balances imagining that we had a prior accounting system, and we’re entering the beginning balances from it as of the cutoff date 1231 22. So we can move or forward as of January 1 2023.
Last time we entered the inventory items, which got us to this number for the inventory assets at the 2008 96. Now that we have that in place, we also want to think about setting up our sales tax so that when we make the sales, the sales tax will be appropriately calculated.
Going forward, quick recap on the sales tax how it’s going to work, I’m going to jump on over to the flowchart.
Remember, the sales tax will typically be applied this is a desktop flow chart, but we’re just looking at the flow here looking at the customer cycle.
Usually when we make a sale, if there’s going to be sales tax applicable, we’ll need to be using the invoice form or the Sales Receipt form, we’re going to be charging whatever we charge for the actual item being sold. And then we’re going to have to bump it up for the sales tax so that we’re going to be collecting on the sales tax.
The sales tax in theory is not something that we are charging as the business owner, but rather we are the collection agent for the tax agency. And therefore we’re not going to record the amount we collect for sales tax as revenue, and then expense it when paid.
But rather, we’re going to put it on the books as a payable when we make the sale. And then we’ll decrease the payable when we pay the sales tax.
So that’s the general idea in the United States, the sales tax is going to be a state and local tax as opposed to a federal tax. So we don’t have like a blanketed sales tax over the whole country. It’ll be dependent upon the location and could be dependent on other like where their sales took place, and so on, and so forth.
But therefore, it’s a little bit more complex. QuickBooks does have a nice setup process to to try to help us to calculate the sales tax. Now also, we want to keep three things in mind with the sales tax.
The first thing to keep in mind is you got to turn on the sales tax, which we’ll do down here in the taxes tab on the left, if you’re in the business view, you also have a taxes tab on the left as well.
Once the sales tax is turned on and set up, the system needs to know whether or not the sales tax is going to be applicable or not. The primary thing that will give the indication there is the items that we set up last time, the products and services that’s under the sales tab.
And in the products and services and the business view, it’s under the get paid and pay tab and the products and services. So we set these up before.
For us we’re going to say that the inventory items are typically subject to sales tax, the service items are not going to be subject to sales tax.
So once we turn the sales tax on, we’ll have to verify that there’s properly recording the items having the taxable components or not. And then the third thing we have to think about all of the customers meaning, for example,
is the customer subject to what sales tax is the customer going to be subject to and if we have multiple sales tax applicable and we might have some customers that aren’t subject to sales tax at all,
so we could then go to the customer and kind of override the primary item that’s going to indicate sales tax, which will be the inventory items.
Okay, that said let’s see how it works. Let’s set up the sales tax. We’re going to go to the tab on the left. We’re going to go To the taxes, and we’re in the sales tax.
So I’m going to close this back out, says up top, automatically calculate sales tax rate for each sale, one, create an invoice or receipt to we calculate the sales tax rate based on date, location, type of product or service and customers,
those are the three items and three, we keep your sales tax updated when laws change, so you stay compliant, which is nice, the system’s getting better and better at applying the sales taxes on state and local level,
which is more complex than just the federal level. So that’s, that’s nice. So we’re going to use the automatic sales tax. Here’s the address we have on record.
So they’re using our address, which is going to be the primary address that they’re going to try to calculate the sales tax. And so they’re gonna say,
Hey, what are the this is my my interpretation? What are the sales tax requirements for a business located at that address? That’s going to be what they’re going to assume is going to be applicable in general.
So we’re going to say, All right, let’s keep that so I’m in California here. In practice, we’ll try to make the sales tax kind of generic, I’m going to try to override it to 5% when we make the sales, just to keep it like a generic sales tax.
But it’s going to be based on the location here. Okay, tell us more about your taxes. We calculate sales tax based on what you sell, and where you sell it. So if you sell in multiple locations, we calculate the correct sales tax for each one.
So do you need to calculate sales tax outside of California? I’m going to say no, which will, of course be more simplified. If you do have sales tax in multiple locations, then you’d hit yes. And you got to make sure that you’re filling out the information necessary for for the sales tax for multiple location.
So it looks like you need to pay tax out to just one government office in California. We call this your tax agency, your tax agency, California Department of tax and fees administration, I’m going to copy that in case they want to force me to make the the vendor for that.
But yeah, that’s what we pay, then in California looks good, nice, long title for the California Office, their automatic sales tax is set up, give it a spin by creating your first invoice. So I’m not going to create the invoice here.
Because I think that kind of confuses things, I’m going to close this out first. And that then gives us our sales tax information to further populate. So how often do you file sales tax.
So you can find this info on your sales tax business registration. So if we’re subject to sales tax, then we got to make sure that we’re set up our sales tax with the the appropriate office of the sales tax. And then we need to determine how frequently we need to pay the sales tax, never remember what happens, we make sales, we’re going to collect the sales tax, which hopefully should be set up to do that, at this point in time. And then the money that we’ve collected from the customers, because we’re just a collection agency, now. They’ve made us into their their collection agency, we’re gonna have to then pay that to the government.
At some point in the future, how is that going to work? Am I going to be collecting the money on the sales for the month of January, for example, and then have to pay the January collections I made in February, or maybe I can collect for three months, the whole quarter, January, February, March.
And then I pay at the first month of the following quarter, and so on, or maybe they let me collect all year, and I only have to pay one time what’s going to be the deal.
So if you can’t find it, or change or or it changed our check out the table to see. So if you so normally you would want to go to your personal information. But they have the default information down below, you got the California Department of tax and fees.
Generally, if you don’t make a lot of sales, the government’s more likely to say hey, we’re just going to make you file yearly. Because whatever, you don’t make a lot of money anyways.
This is of course subject to California, it will differ based on your location, but you have a similar kind of concept. So filing frequency, so do we file monthly, quarterly or yearly? Again, this will be dependent on location. And typically the amount of sales you make.
So that’s fine. But if you start making more money than they want it quarterly because they want to check up on you to make sure that you’re doing things right. If you make a lot of money, they want it monthly, because they want their money because now you’re making money and they want their money and you know how it works. So there it is.
So I’m going to say monthly for the purposes of the practice problem, so that we can see a payment happen, then we’ve got the California filing frequency. So this is just for California. But again, you would think there would be similar similar filing requirements depending on your location.
So here’s the source information if you wanted to check it out. I’m going to save it there. And so that should complete the setup process. So
now when I’m in the sales tab, so if I hit the plus button, I’m in the sales tab again. We’ve got our information autosave for sales tax, the California is our location, we just have the one.
And then the California Department of tax, we’ve got the nice little tag down here, you’ve got your sales tax settings. If you need to make any adjustments to the sales tax setting, here’s going to be the agency, if we needed to add an agency,
we can hit the plus button and go through the process of adding another agency up top, you can also have your custom rates down below.
Now for the purposes of the practice problem, I would like to have basically a custom rate of like 5%, just to make it generic. So I’m going to try to add a custom rate. And so add a custom sales tax rate. And I’m going to just going to say,
say, sale or or test rate, I’m going to say the agency, I’ll keep it the California Department here, and I’m going to say the rate is 5%. So I’m going to have a generic rate that I’m going to be applying. And I’m going to say Save.
So now we’ve got our generic rate on down below that we have added, I’m going to go back to our sales center up top. And then you also have your economic Nexus over here.
If you go into that. It says all states have rules about collecting sales tax from out of state businesses. So you’ve got kind of problems, of course, now when you have sales that are happening in different, you know,
across state lines and whatnot. So if you do enough business in a state, you may owe them sales tax, even if you don’t have a physical location there will help you figure out if you meet the threshold to pay sales tax in different states. So then you can kind of dive in here and do some more research on what your sales tax obligations are.
When you get into more complex situations, making sales in multiple locations. The next thing we need to look at are the items that we set up in the prior presentations.
Because if I hit the plus button up top, we’re going to be calculated the sales tax, possibly when we create an invoice or the sales receipt, and the primary item that’s going to drive that just to open an invoice and take a look at it will be the item the item is going to be the thing that’s gonna say, hey,
is this thing subject to sales tax or not. So now we want to go over to our items and look at them. So I’m going to leave without saving, do you want to leave without saving, I’m going to say yes.
And then I’m going to go on over to my items, which is under the sales tab, you’ll recall, if you’re under the business view, it’s under the get paid and pay tab, product and services items. And I’m going to close up the hamburger and then scroll down. Now I think by default, it’s going to apply the sales tax.
So if I go in, say to editing an inventory item, and I scroll down, now we have this sales tax item here it says taxes standard rate will apply sales tax based on location only. So you could go into this and add more detail. So they’ve got information in here, as you see you can browse the item.
But notice down here we have it as taxable based on location. So I’m going to keep that as the default. And so I’m going to say that’s great. Let’s go on to the service items, then, which I think I’m going to have to adjust and remove the sales tax, I’m going to say the service items will not be subject to the sales tax.
So I’m going to just edit the service items. This is why it probably in some ways might be easier to turn on the sales tax and then add your items.
But I think it’s easier to see what’s happening with the sales tax by doing this way. So that’s why we’ve done it this way. So we’re going to edit the sales tax. And this one I’m going to say is non taxable.
So I’m just going to do this for all the service items. So I’ve made that service item non taxable. Save it and close it. So that was this service item, I’m going to do the same for this one, edit this service item. And I’m gonna say taxes and say that it’s non taxable,
and that and say done. And that’s for the TuneIn. So I’m going to save it and close it. And then the late fees, I’m going to edit and go down to the taxes and say this is going to be non taxable, done, save and close for the late fees, this the service charge, I’m going to edit and scroll down and say that it’s going to be non taxable.
Save it and that’s for the services. So I’m going to save and close and then the hours I’m going to edit and say that it is non taxable two more times, non taxable boom, and then diagnostics Edit, and then I’m going to say that it is non taxable for that item. Boom, save it and then one more time on the hourly service, non taxable.
And there we have it. So now the inventory items are taxable All I’m saying the service items are not taxable. And so we should be able to see that when we make a sales item now, so if I hit, so let’s go to the plus button up top and just add a test transaction,
we won’t record it. But just to test it out, let’s open up an invoice, you can also do a sales receipt, but we’ll just go with an invoice, we made up a mock customer, which we just called a AES,
I’m just going to say the AAA customer just to test it out. And then we’re going to go down to the products, the products should be the taxable items. So I’m going to choose C and E LP, and you can see it has a checkbox automatically as it being a taxable item.
Now, sometimes you have to like click off on the second line to make sure that it applies the tax properly down below. So now we’ve got a $500. That’s what we charged for it. And then the sales tax is being applied notice being it’s being applied by location.
Now the customer doesn’t have a location up top. So therefore it’s being applied by what we’re saying is our sales location, which is the California location.
And that’s where it’s coming up with it’s 47 550, you can look at the math related to it, if I go into here, how’s your sales taxes calculated, we’ve got the location based on where you sold your item, you need to collect sales tax here.
So notice, it’s actually three things that we’re collecting the the California rate, the Los Angeles County and the Los Angeles County District. And that adds up to that 9.5% on the sales tax that we’re adding.
So notice it gets a little bit complex. and QuickBooks is actually quite nicely doing that for us. And the complexity will differ based on location, of course. And so for our practice problem, we’ll actually do a generic, just the 5%.
To see the generic tax, just so we can make an a generic that can be something that’s in concept applicable to the whole country without kind of just focusing on California, you can also change the math here if you wanted to just for a practice problem, or if you needed to, for whatever reason,
by overriding this amount, and then you can apply, you know, like the 5% rate if you wanted to. And then and then the reason because I said so you know other. And and so if for whatever reason you need to force it to do it, you can override it.
But you want to be careful doing that we were going to override it kind of for our practice problem. Now, if I close this out, the third thing we got to consider is the customer.
So remember, if I go back into my customers, which is under the sales tab, and then my customers, if you’re under the business view, it would be under the get paid and pay tab, and then the customers. And then when we set up our customers,
by default, they’re going to be subject to sales tax is based on what they bought. But maybe they’re not subject to the sales tax. So if I go into this AAA customer, for example,
and I edit them, and I go into their sales tax information, which is down here, then usually the sales tax is going to be by default, based on location, that’s what generally happens.
Or you can choose the 5%, which is the other the other tax if they’re subject to that. So if you have multiple rates down below multiple subject to sales tax rates, then you would choose the applicable one, right, it’s going to default to the based on the location, I could choose to 5% if I wanted to, or I can say this customer is,
is exempt from sales tax, this customer is tax exempt, why maybe they’re a government agency or charitable organization, or whatever. And so I can put the details. So if I did that, then I close this out, I go to the plus button, have a new invoice.
And I choose everything that’s the same as a customer, a product subject to sales tax. But in the end even has its sales tax checked off, but no sales tax being calculated.
If that happens, you’re gonna say hey, why isn’t it happening? I got it checked off and nothing’s happening. Well, maybe the customer then is set up to not be subject to sales tax.
So the next thing you need to check is the customer side. Is it proper that the sales tax isn’t being calculated even though you got to checked off and sales tax set up, and the item is subject to sales tax, because the SUP the customers some house are not subject to sales tax. Let’s close that out. And try it again.
Go back to the customer. And let’s edit the customer and say now that the customer is subject to a different rate. So we’ll say they’re subject to sales tax, but maybe it’s that 5% rate.
So I’ll go Okay, so now if I hit the plus button, and I go to the invoice and I go everything’s the same I go into the customer and I say okay, sales tax, taxable item. But now the rate that’s going to be charged is the 5% as opposed to the normal California rate, right.
And then of course if I chose something that’s not subject to sale was tax, like the service item, a diagnostic, then sales tax isn’t applied because the item is now saying it’s not subject to sales tax.
Alright, so I’m going to close this back up. By default, if I go into the customers will will go this back into the customer and say by default, it’s usually going to have the default setting of the customer’s taxable and then it’s going to be based on the location.
So that’s the default unless you say something otherwise. So one more thing if I record something on the invoice now you can see how complex this transaction is getting.
Even though the data input is quite easy. If I choose an inventory item, then what’s this going to do? The invoice is going to increase the accounts receivable by the full amount including sales tax 547 50 The other I’m not going to actually record this by the way,
I’m just saying what would it do, the other side is going to go to sales, the 500 driven by the item which we told it to go to the sales revenue account,
and then the tax is going to go up not to an income account not to revenue but a payable account given the theory that we’re not actually charging the sales tax we’re just a collection agency the sales tax is being charged by the government to the customer therefore it’s not income to
us but a payable a liability as we collect the tax and then we’re going to pay it later and because it’s an inventory item, inventory is going to be going down and also the cost of goods sold is going to be going up and the sub ledger for inventory in terms of by
Will the sub ledger for inventory by amount is also going to be impacted going down the units of inventory and the the customer sub ledger tracking
who who owes us the money is going to be impacted as well complementing the accounts receivable so a lot is going on with just the invoice now. But the data input is quite simple. So once again, I’m not going to record this closing this out. Do you want to leave without saving? I’m going to say yes, sales tax now set up