Sunday, January 9, 2011

Use Tax in QuickBooks

Typically when you go into a store a buy a taxable product the store collects the sales tax from you and remits that tax to the appropriate taxing authority.  However, when you buy items via the internet or out of state the company you buy it from may not be required to collect the sales tax from you.  If they do not collect the sales tax from you then you become responsible for remitting "use tax" to the proper tax authorities based on that purchase.

Many small businesses purchase items over the internet for their business from vendors who do not collect sales tax.  When this happens it's best to immediately record it in your accounting records so you don't forget to pay it.  You can usually remit this right along with the sales tax that you collect from your customers.

If you're using QuickBooks for your business, this is one approach that MAY work for your company.  This approach is NOT a good approach for every company.  It's best to talk to your QuickBooks ProAdvisor and/or accountant to determine if this method of tracking use tax will work for your business.

By doing the following the use tax that your company owes will show up in the "Pay Sales Tax Window":
  1. Create a "Sales Tax Item" called "Use Tax" and use your use tax rate and your sales tax agency.
  2. Create a "Other Charge Item" called "Reversing Items Sold" and indicate that this is a nontaxable charge and code it to an Income account.  You can create a new account for this or you could code it to the one you use for your inventory parts items.
  3. Create a "Other Charge Item" called "Use Tax Expense" which should also be nontaxable and coded to an expense account such as "Use Tax Expense".
  4. If you don't already have an item to subtotal the invoice add that as well.
  5. Create a customer for your business in the Customer List and for the default tax code (in the Additional Info tab) use the "Use Tax" item you created.
  6. Write invoices to yourself for the inventory part item you purchased.  Use the items cost as the selling price.  This will assure that you're calculating use tax on the cost of the items.  Once you are done entering the items you purchased without paying sales tax subtotal the invoice (use the subtotal item).  On the next line, use the "Reversing Items Sold" item and enter the subtotal of your purchase as a NEGATIVE amount.  This will zero out the cost of the pre-tax products on the invoice.  On the next line use the "Use Tax Expense" item and enter the amount of the use tax that is calculated at the bottom of this invoice as a NEGATIVE amount.  This will bring the total invoice to zero.
I've created this video, Record Use Tax in QuickBooks to demonstrate how to set this up, how to record an invoice and show you how it will look on your sales tax report.

1 comment:

Anonymous said...

I've tried several things with not much success so thought I'd give this a try as well. I went through all the steps, creating the items, etc and then created an invoice. All was ok until I got to the last line of the invoice where the item code is "Use Tax". A warning pops up that says, "This sales tax item has been specified in the Tax field or is a member of the sales tax group being used in the Tax field." Am I doing something wrong?