How to Set Up Sales Tax in QuickBooks?

How to Set Up Sales Tax in QuickBooks?

In QuickBooks®, you can collect and remit sales tax on behalf of governmental authorities. To do so, you need to establish sales tax items and codes. You might also need to create sales tax groups.

Do not forget to register with the department of taxation for the state(s) you will be selling in. Each state has specific rules and guidelines, as well as providing you with a unique filing identification number for your business. Not all states require sales tax to be charged to your customers on specific items sold. To see if the taxing authority has special guidelines to follow, call their sales tax department; my experience is they are quite helpful and can direct you to the needed documentation.

Sales tax items are used to identify specific rates charged to your customers and the tax authority vendor to which you remit the sales tax. You might have one sales tax item, or several, on your item list.

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After enabling Sales Tax in preferences, to create a sales tax item in your data file, follow these steps:

1. From the menu bar select Lists, Item List.

2. In the Item drop-down list, select New to open the New Item dialog box.

3. In the Type drop-down list, select Sales Tax Item as shown here:

4. Enter a sales tax name for the sales tax item; the name should identify the applicable jurisdiction. See image below:

5. Enter a Description you want printed on the customer’s invoice.

6. In the Tax Rate (%) box, enter the rate the taxing authority charges.

7. In the Tax Agency (vendor you collect for) drop-down list, select the vendor to which you remit your sales tax payments. If your vendor is not set up in QuickBooks, select Add New at the top of the list to create a sales tax vendor record.

8. Click OK to save the sales tax item.

With sales tax items created, you can group them into sales tax groups if the state requires collection and reporting on multiple tax entities.

Each state has different requirements and rates for reporting sales tax. It is critical you research the applicable regulations and set up QuickBooks correctly. Otherwise, your business can be subjected to expensive – and avoidable – penalties.

Some Concepts

If you are going to charge sales tax on an invoice, several things must be set up:

The sales tax preference must be enabled.
You need one or more sales tax items and possibly some sales tax groups in your Item List.
When you create an invoice, you must have a taxable customer tax code selected, a sales tax item or sales tax group selected for the tax, and any taxable charges must be set as being taxable on the detail line.

Enable Sales Tax

To start, you need to enable the sales tax preference. Select Edit then Preferences and select the Sales Tax prefence. Click on “Yes” for the question “Do you charge sales tax”.In the lower half of this screen there are several options to review to make sure they are set properly for your business (how often you pay sales tax, and so forth).

Sales Tax Items

As you probably know, all charges that you add to an invoice must have an entry in the item list. Sales tax is the same. You will create one or more sales tax items in the item list. You can do this by clicking on the add sales tax item button in the preferences screen, or by adding an item to the item list in the normal way.Enter the percentage for the sales tax, and a vendor for who you pay that sales tax to (typically your state sales tax agency).

Multiple Jurisdictions

So what do you do if you have multiple jurisdictions? You could have a situation where you have a state tax, a county tax, a city tax or even more. When you file your reports to the state tax agency you need to split out the amounts by jurisdiction, usually.

To manage this, create a sales tax item for each jurisdiction. One for the state, one for each county you work with, one for each city. However you need to break it down for your reporting. Then, create a sales tax group item and add each of the jurisdiction taxes:

If you use this sales tax group in an invoice the rate will be 8.1%, but the program will report each tax separately.

Please note that if you have a large number of taxable jurisdictions this can become very complex. You need to have a sales tax item for each jurisdiction, and a sales tax group for each “nexus” or location that has different combinations. There are third party add-on products that help with sales tax tracking, but these usually are reasonable only if you have a large number of invoices to process.

Back in the preferences section, in the dropdown list Your most common sales tax item you can select the sales tax item or group that you most commonly use.

Customers and Items

Now, let’s look at your customers and items. Some customers are taxable, others are not. Some items and services are taxable, others are not. We will set up both to have the usual value for taxation, although you can always override this when needed.

Edit your customer, you can specify which sales tax item or group to use for this customer. Also, the tax code needs to be set – it should be set to tax.

Putting It All Together

Let’s create an invoice for this customer. The default values for the tax related questions are taken from the customer record and item records used. Three things must be set to have sales tax calculate: The customer tax code must be taxable, the tax item or group must be selected, and the tax setting on the item must be selected. If this all happens, sales tax is calculated properly.

Remember, you can override these if you need to change something for a specific situation. If one line isn’t to be taxable for some reason, change the tax setting on that line to non taxable. If the customer should get a different tax rate, change the tax item or group for the invoice. You can also change the customer tax code.


I’ll talk about sales tax reporting in a future article. Note that to get the most efficiency out of your QuickBooks program you want to set up and use your sales tax items properly.

Update for QuickBooks Online Sales Tax

Intuit has released a major update dealing with QuickBooks Online sales tax management, and I think that this will significantly help small businesses improve the accuracy of their sales tax reports as well as save them time.

Any business that sells taxable items in the United States has to deal with sales tax. It is complicated! If you sell items in multiple states, you may have to deal with a wide range of very different sales tax rules and regulations. Even if you sell to just one state, keeping track of multiple overlying sales tax districts can be a horrendous chore. It takes a lot of time to manage this, and it is very easy to make mistakes.

Up to now the sales tax feature in QuickBooks Online has been very simplistic. You have to manually enter your sales tax rates, and keeping them up to date has been a chore. Determining what sales tax to apply in different situations was extremely difficult. Aren’t our accounting systems supposed to improve accuracy and save us time? Sales tax wasn’t an area where QuickBooks Online excelled.

With this new update, QuickBooks Online takes over managing your sales tax calculations, simply and accurately.

With the new system:

Sales tax information is created for you automatically, all you have to do is select the tax agencies that you need to work with.
The proper rates are applied to your invoices, based on your address, the customer’s address, the type of item being sold, and even the date that the item was sold.
Reminders are generated when you need to pay your accrued sales tax to the appropriate agencies.
Note that this feature is only available in the US versions of QuickBooks Online and QuickBooks Online Accountant. Also, it won’t be immediately available to all existing QuickBooks Online users, as I’ll explain in detail below.

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Setting Up Sales Tax in QuickBooks Online

Sales tax management is not enabled in QuickBooks Online by default. To enable this, you will go to the Taxes option in the left navigation menu. This was a bit odd to me, as I was initially looking in Account and Settings, where most preferences are found.

Enabling Sales Tax

When you select Taxes, if your QuickBooks Online account has the new feature you will see a setup screen like the following:

Note that at this time, if you have already enabled sales tax in the past, even if you never used the feature, you will not be able to use the new sales tax feature. It is only available to new QuickBooks Online users, or existing users that have never enabled sales tax. I’ll discuss the ramifications of this at the end of this article.

Clicking Set up sales tax takes you to this screen, where you enter your current address. If you change what is here it will be stored in your company

The program will select the appropriate sales tax agency for you automatically, based on this address.

Some businesses are required to collect sales tax in multiple states. You are given that option in the next step. If you aren’t sure about this, you can say No here and then add the other tax agency later.

In my case, it already has the California Board of Equalization on the list. All you need to do here is to select the Start of tax period, your filing frequency, and the date that you want to start sales tax calculations.

Although Intuit doesn’t tell you at this point, the Start Date is important. In my example I selected January 1 of the current year, even though I’m setting it up in November. This causes some minor hassles because I selected half-yearly for the frequency, so QuickBooks Online will tell me that I have a past due report for July. I really only need to use this feature to file a report for the last half of the year, so I should have picked a start date in this half of the year. Fortunately, it is easy to change the start date later on.

If I am required to collect sales tax in other states I can click the Add agency button.

Gear icon in the upper-right corner and select Account and Settings. Select the Advanced tab and go to the Accounting section. Choose Inclusive of Tax in the Default tax rate selection field