Rustler’s Quickbooks Tips

Suppose you sell 8 items and want to discount the sale. The sales tax collected should be on the total of the items less the amount of the discount.

Enter all your items that are being sold, then enter a subtotal item. Then on the next line enter your discount item. Insure that all items are marked as taxable. QB will calculate the new total (subtracting the discount amount) and calculate the sales tax based upon the new total.

The discount item is interesting (other charge item), when you set it up it asks for an amount or a percentage and that is what shows on the invoice when you use it. but you can click in the rate column on the invoice and change it to a dollar amount or any other percentage, just make sure you use the negative sign. When you set up the discount item make sure you use the negative sign in the rate column or QB will think it is a charge, since the item being used is an “Other Charge” item.

Let’s say that your state only requires you to pay sales tax on 80% of the total charged for your particular service, rather than taxing the whole amount. And let’s say your normal sales tax rate is 8.25% (0.0825) as it is here in Texas.

The easiest way to accomplish this is to find what I call the effective rate. The rate where, when you apply it to the full amount, the tax calculated is the same as if you had first determined 80% of the sale and then applied the 8.25% tax rate to that total.

Pick a number, any number, how about $1,225.00.

80% of $1,225.00 is $980.00 and the sales tax on that amount at 8.25% is $80.85. So that is the amount you should collect on the sale of $1,225.00 where only 80% of the sale is taxable.

Divide $80.85 by the total sale $1,225.00 and you get .066 or 6.6%. That is the effective tax rate.

If you multiply the original sale of $1,225.00 by 6.6% you get $80.85. Pick a few other numbers and check it, it works.

So if you set your state tax rate to the effective rate, it will always calculate the tax based upon 80% of the total as the state requires. You should keep all digits after the decimal point when calculating the effective rate (do not round it), this one worked out well, another number combination might not.

Sales tax rates and new rates.

QB allows you to change the sales tax rate in the sales tax item and all future sales will use the new tax rate.  That is great huh?  Don’t do that.

The problem is that there is no way to go back if you have to re-write an invoice due to some kind of adjustment or something, QB will use the current sales tax rate rather than the one that was in effect when the invoice was written.

When sales tax rates change, create a new sale tax item, change the name of the old one to show the ending date for its’ use, and make the new one the default.  Then if you have to go back, you can select the old tax rate and use it.

Took me awhile to figure out the relationship on the invoice.

Each item has a taxable status you can set (either on the invoice or set the default for it on the item screen)

The invoice total can be set to taxable, non-taxable, or any of the kinds of taxes you have set up.  If you set it to non-taxable then even if the items are set to taxable, nothing is calculated.

And then there is the customer tax code which can be changed on the invoice but is normally set on the customer edit screen on the additional info tab.

The customer tax code overrides everything.

So I suggest setting all items to taxable, and if you have a customer who does not have to pay sales tax, set that customer to non-tax and let the customer tax code override the taxable item setting.  That way when you do sell to a customer who does have to pay the sales tax, the invoice will do it right without any extra input from you.

QB will not let you set a flat rate for sales tax, nor will it let you create an other charge item and point it to sales tax payable - dumb!

In some cases including sales tax in your selling price can’t be done the way I suggested when I talked about an invoice. A prime example of that is a bar business. Bars sell drinks across the table and do not calculate sales tax separately.

But bars still need to pay sales tax on what was sold.

The math still holds as to how to calculate what part of sales is sales tax and what part is income (see the other post to see the math). But the reporting on the financial Profit and Loss Statement has to be different.

Normally sales tax is a pass through activity, you collect it, you hold it and you pay it. It is seperate from sales income.

When you run a bar it is part of gross sales, so when you back it out to pay sales tax to the state, you have to expense it. If you do not expense it, you are paying income tax on the sales tax you collected.

So when you calculate the sales tax owed on gross sales you need to make some journal entries. Debit an expense account called something like “Included sales tax expense” and credit “Sales tax payable” for the amount. That takes the sales tax paid to the state out of gross sales when the expenses are deducted on the P&L and shows what you owe to the state comptroller.

A sales tax discount (money you collect in sales tax but do not have to pay) is an income to the business.

When you click the pay sales tax icon, there is a button titled Adjust, click it, mark the adjustment as reducing sales tax, and select an income account, then enter the amount of the discount and click OK.

When you do that QB will move the amount of the discount to the income account you select and reduce the sales tax owed. I use the income account “Other Income”, but any income account will work.

If you want to sell at a price that includes your sales tax, it can be done. QB doesn’t have a button to do it, but here is one way.

What you want to do is discount the price received so that the selling price + sales tax = received price (if that makes sense)

If your tax rate is 8.25% as mine is
(8.25% = .0825).
so

You add the decimal to one and get 1.0825, then …
You divide 1 by 1.0825 = .9237875

That is your constant (what I am going to call it anyway for this discussion).

If you multiply that constant by the $10 received you get $9.24 (rounded up)

$9.24 * 8.25% (9.24 * .0825) = 0.76 (the tax on the sale)
$9.24 + 0.76 = 10.00

What this did was prove that the tax can be calculated correctly with the constant just for your own peace of mind knowing it works.

So now you subtract the constant from 1 to find what the actual discount rate is. A discount rate is basically how much you reduce the price.

1 - 0.9237875 = 0.0762125

0.0762125 is the decimal representation of 7.62125%

So what you do is set up a price level called something like “includes tax” and when you mark an item in the list (mark all in this case) and where it says to reduce all prices by, enter the percent 7.62125 (do not round the decimal).

Then when you sell something make sure you select this price level and tax will be included in the total price that you advertised. Tax will show up in the tax box, and if you have sales tax set up correctly it will go to sales tax payable.

What the customer sees is a reduced price for the item and the sales tax, when added together they equal the advertised price.

QB has a bug. When you use a sales tax group you specify each sales tax entity and the percentage they collect, and then just use the group to calculate sales tax - sounds like a plan huh?

Well it is in a way. BUT what QB does is calculate each sales tax item and does the rounding for that item, THEN it totals all the items in the group to get the final amount of sales tax. That can result in a rounding error of a penny or more.

There is no solution that I know of.

What QB should do, and doesn’t, is to provide a limit field in the sales tax group so that the total of all individual items in the group does not exceed the percentage listed for taxes.

QB does not handle “Use Tax” at all. (there are two ways to do it in this entry)

Use Tax being the sales tax the company owes on items bought across state lines where no sales tax is paid on the purchase but there is still a requirement to pay that sales tax to the state comptroller, or the sales tax on items withdrawn from inventory and used as demos, samples, and for personal use.

The only way I have found to handle it (relatively easy), is to set up a class “sales tax due” and **remember** to identify transactions with that class. Then just before my quarterly tax payment date I run a class report on that class to get the total of the purchases, demos, samples, and personal use for the period of the sales tax payable requirement .

Outside of QB I use a calculator to determine the sale tax liability on that total, That total is also reported on the sales tax reporting form to the state.

I have an expense account set up titled “sales tax paid”

When I bring up the pay sales tax window I use the adjust sales tax button to enter the new amount of sales tax due, and assign it to the ’sales tax paid’ expense account. Then pay the tax bill.

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In the QB forum, DawnSBAServices in Oregon showed us a way to track use tax for items purchased. Purchased is the key word here. Create, if you do not have them, a liability account called something like “Use Tax Due” and an expense account called something like “Use Tax Paid.”When you enter the bill, calculate the amount of tax you should pay on a calculator, then select the “Expenses” tab. On the first line select the “Use Tax Paid” account and enter the amount you calculated. On the second line select the “Use Tax Due” account and enter the same amount as a negative. In the memo block enter the amount of the bill.

When sales tax time rolls around, do a quick report on the account “Use Tax Due”, that will total the amount of use tax you owe, the memo block will list the total of the invoices that the use tax is due for, use a calculator and add them up, this is the amount you report for the value of use tax due.

Bring up pay sales tax, click the adjust button, mark it as an increase, select the tax vendor, and select the “Use Tax Due” account as the adjusting account. Enter the amount of Use tax due, click ok.

Update:

Carrying Dawn’s solution one step further and accounting for inventory items that are withdrawn from inventory and used in the business, I found this way to do it.

Create an expense item called “Use Tax Paid” and point it to the expense account with the same name.

Create an other charge item called “Use Tax Due” and point it the liability account with the same name.

Open the item list and right click on the item, look at the very bottom and write down the avereage cost of the item, you should NOT use the cost in the cost block just below the description block, most times this will be the same but not always, and QB uses the value at the bottom called average cost.

Bring up a sales receipt, select the item and then click in the rate column and enter the average cost figure you wrote down.  Mark the item as non-taxable. Then do the calculation and enter the item Use Tax Paid and the amount, then on the next line enter the item Use Tax Due and in the quantity column a negative one and the same amount, and enter the amount of the sale in the memo block. (Invoices and sales receipts will not allow you enter a negative price.)

You could just sell the item at cost to the company and let the sales tax be calculated automatically as sales tax due, but for some reason states want the use tax number seperate.  When I talked to the Texas comptroller for sales tax audit department they said they wanted it called out separately and if it wasn’t then during an audit they would have to do the calculations all over even though the result (tax due)  is the same and the audit file would show that you were not reporting correctly.  I got the impression that having that notation in my file would not be a good thing since it would tend to make them more willing to look at me again in the future.  Your choice.