QuickBooks Small Business

Tracking Use Tax on Purchases in QuickBooks

Written by Doug Sleeter

taxI was recently asked by a reader about how to track Use Tax on purchases in QuickBooks. In states that charge sales tax, purchasers within those states often avoid paying tax by purchasing items from out-of-state suppliers. However, they are required to report those purchases to the state in which they“use” the purchased items, and then remit the tax that should have been charged by the seller on the original sale date.

Question: How to Track Use Tax?

A reader asked:

How can I track Use Tax on purchases I make? Occasionally I purchase items from a vendor that does not charge tax (I have a resale certificate filed with the vendor), but the goods are taxable because I hold them for my own use. Therefore, I need to add the Use Tax to my sales tax payments (and sales tax return), but I don’t know how I can track these purchases. Can you help?

Answer: Post To Sales Tax Payable

If you don’t pay any tax when you purchase, but you need to pay a “Use Tax” on your sales tax return, you’ll need to track these purchases so you can get a report on all such purchases later. This situation occurs when your company purchases items for use in your own business and not for resale. Those are taxable purchases, but you might not pay the sales tax at time of purchase because you have a tax-exempt certificate filed with the supplier, or you purchased it from an out-of-state vendor who does not collect sales tax for your state.

You CAN track this in QuickBooks. Let’s say that you purchased $100 in office supplies for your own use but you  didn’t pay sales tax at the time of the purchase. You have a 5% sales tax rate.

  1. When you make a purchase for $100 in taxable office supplies (but tax is not charged), record the purchase by assigning $105 to the expense account (office supplies) and -$5 to Sales Tax Payable. In the “name” column of the Sales Tax Payable line, enter your sales tax agency. This will increase Sales Tax Payable and it will show up in the Pay Sales Tax window on a line with no sales tax item (the one where you normally see sales tax adjustments).
  2. When you pay the tax to the state, select all of the sales tax items plus the last line with no sales tax item and it will add the extra tax to your payment.
  3. To get a report on all purchases made where sales tax was not charged, create a Transaction Detail by Date report and filter it for Transaction type: Check, Bill Account: Sales Tax Payable, and the date range that you want This report will show all transactions on which you recorded a use taxable purchase.

 

About the author

Doug Sleeter

DougSleeter (@dougsleeter) is the founder and former CEO of The Sleeter Group, an international network of accounting software consultants, and the former producer of SleeterCon, an annual conference and tradeshow for accounting professionals.

In 2015, he sold The Sleeter Group to Diversified Communications (www.divcom.com) and the company has since become The Accountex Network.

He is a passionate leader of innovation and change in the small business accounting technology world. As a CPA firm veteran and former Apple Computer Evangelist, he melded his two great passions (accounting and technology) to guide developers in the innovation of new products and to educate and lead accounting professionals who serve small businesses.

Always in search of the next big thing, he is currently focusing on digital currencies and blockchain technology. He believes these technologies will change virtually everything in global commerce.

The CPA Practice Advisor recognized Doug as one of the "Top 25 Thought Leaders" in the accounting profession and he has been named to Accounting Today's "Top 100 Most Influential People in Accounting" each year 2008 through 2015. In 2013, he was recognized by Small Business Trends with the Small Business Influence Champion award.

In the early 1990s, Doug was a pioneer in developing the first QuickBooks seminars in the country and has since built the largest group of accounting software consultants in the small business accounting profession. Doug serves on several advisory boards for technology companies and has consulted with numerous industry leaders including Intuit, Sage, Apple, and Adobe Systems. 

Doug is the author of numerous books and courseware materials including The QuickBooks Consultant’s Reference Guide, and QuickBooks Complete, a college textbook.
 
Doug attended both the University of California Santa Cruz and Santa Clara University and holds a Bachelor of Arts degree in Computer Information Systems. Doug and his family live in Pleasanton, CA. Doug's hobbies include woodworking, golf, and lifelong learning.

32 Comments

  • We handle this similarly, however we set up Sales Tax Payable and Use Tax Payable as two sub-accounts to a BOE Payable account. This way the CPA can see at a glance that the Sales Tax Payable matches the sales tax return and the Use Tax Payable matches the use tax return. This also helps when the business owner owes several thousand dollars in use tax and a few hundred in sales tax…seeing such a large amount in Sales Tax Payable tends to lead to confusion and panic! 🙂

    • I like your idea of naming the other one use tax so it is not confused with regular sales tax transactions.

      Thanks,

      Michele Watson

        • On the bill, split the purchase into two amounts using two split lines in the area where you assign accounts. On the first line, enter the expense, or whatever you use for purchases. On the second line, enter “Sales Tax Payable” in the account column, and then in the name column, enter your sales tax vendor name. This all assume you’re using QB desktop, any edition. If you’re using QBO, I’m not sure this works the same. Someone else will chime in here to help I’m sure.

          • i thought i did that the way you said but it doesnt show up in my sales tax liability report.

  • Mac users: The reporting and paying of use tax works the same on QB Mac, with the huge exception that you’ll need to use a Journal Entry in the place of a check, bill, or credit card charge because none of those transactions will allow you to enter the tax agency in the “name” column.

  • I, like Doug, post to Sales Tax Payable – but instead of increasing the office supplies account(to use his example)by the Use Tax – I set up a separate Use Tax expense account – just so that it’s clear, if the state were to come in, that I do pay use tax and I also can get a report on that account, just for the Use tax portion.

  • How do you remember which vendors you should charge sales tax? In the account settings area of vendor setup, put the normal account your charge this vendor to in both the first and second spots, and then put the sales tax payable in the third spot. Then you charge the vendor invoice amount to the first line, the tax amount to the second line, and the sales tax payable comes up automatically to equal the second line as a negative.

    That way you don’t forget to charge it.

    • Good idea Scott.

      So if you have a 5% tax, you would want to fill out the splits like this.
      Line 1 – Expense/COGS account – 100% of the vendor invoice
      Line 2 – Expense/COGS account – 5% of the invoice
      Line 3 – Sales tax Payable – NEGATIVE number matching line 2

      • Hello,
        I set up our company based on this formula. I am having trouble entering in my past payments to the state. I paid the Use Tax using Bill pay and attributed to each job/customer. I entered in Sales Tax payment via Pay Sales Tax. I am not able to edit to apply to job/customer? I can go into Bill pay for the State Sales but it will only let me select a vendor.

        I do see that you used 3 separate lines. Mine looked like:
        State Sales or Use Payable – (5% tax) Chart of accounts
        Item-Material- $Material price + 5% added together.

        Thank you for any help.

      • Thank you Doug and Scott! As a contractor in Virginia, we do not charge tax on goods installed permanently on real property. My suppliers in state charge the tax, so no problem there, but many of my out of state supplies are not taxed. I wish I had learned about this excellent method of tracking in QuickBooks a couple of years ago, but I will begin using it this quarter.

  • If sales tax and use tax had some sort of state to state conformity… but it doesn’t. (1) NYS requires I report the total of those purchases subject to use tax per taxing jurisdiction. They then do the calculations from what I report. To accomplish this in quick books I manually (only way there is) flag each qualifying transaction or split in the comment with [UT]. A saved report searching for that flag with an updated date range will give me a printed report with total all transactions in all accounts so flagged. Luckily, I only pay use tax to 1 jurisdiction. That report stays with my copy of the return in case of audit. What happens during an audit? The auditor crawls through the account journals asking to see this invoice and that invoice to see if it was purchased out of state and what my use of the item was. I can see by the transaction’s comment it was in the use tax calculation and pull the return and show it in the total reported. Miss a transaction or dispute a use? Oh well, good luck.

    As to using the invoice module to track expense payments, I find with Internet purchasing more and more common, most of my use tax transactions are in the business credit card journals. Also most of my major vendors are switching to credit card payment instead of invoicing as it’s actually cheaper (much less labor required)and payment is in their bank in a couple days (instead of a month or two or three). For me it’s thousands of dollars back (1%) from the credit card company, transactions that download and flow into Quickbooks, and multiple payments reduced to one monthly payment which is automatic, anyway.

    As to Quickbooks entire sales tax module – totally abandoned here from day 1 as not suitable to report out the information that NY requires for filing to calculate taxes owed for its 90 plus or minus taxing jurisdictions. I’ve got an ugly kludge of 90 items for the taxing jurisdictions and it’s manual. For another time…

    • Gary,

      Great comments here. I totally sympathize with the New York sales tax debacle.

      I think the best/cheapest approach is to insist that vendors charge you sales tax on your purchase. But until we have the “Marketplace Fairness Act” or something similar, that’s not going to happen.

      I feel conflicted about recommending passage of a new tax law, but in reality, that proposed law really is just a “replacement” of Use Taxes. And as we all know, Use Tax is probably one of the biggest UNREPORTED and UNPAID tax on the planet.

  • I may be a few days late chiming in here, but what I get my clients to do is add an additional line, post 0.00 to sales tax payable and in the memo include the information needed (the total amount to pay tax on). When they print the sales tax payable quickreport, they will have all of the information they need all in one place.

    • Lynn,

      That could work, but if you can get them to the three-line solution suggested by Scott Taylor, it would also accrue the liability right as they record the purchases.

      But, your method would at least flag the transactions so that you could find them all when you go to prepare the sales tax return.

  • Guys,

    Beautifully explained. I appreciate that. As you all might be aware, tax calculation is one part and keeping the track is another great headache. Apart from quickbooks can’t we go for some cloud based solutions as the world today is in a move to cloud computing. But at the same time I am a bit worried whether that will really be safe and secure or not.

    Thanks!
    Carla

    • Carla,
      I see the move to the cloud as a good thing, but many still have their doubts. Although it is quite healthy for us to debate each issue/concern/fear (security, access, usability, speed), those debates should focus on how to mitigate those concerns.

      The only thing I can GUARANTEE about the future is that you cannot prevent it. Although we could refuse to participate, that is not a very attractive option.

  • Great tip, thanks for posting.

    This is much cleaner and more intuitive than the Intuit suggestion of using the vendor type field for vendors to identify those where use tax may be payable.

  • I prefer to increase the expense account and use the sales tax payable account. Also increasing the account if its a fixed asset account helps record the full cost of the asset.

    • Carrie,

      Yes, that is what we’re recommending here. In step 1, the instruction is to code the total amount (cost + sales tax) to the expense account and then add a separate line with a credit to sales tax payable.

      Keep in mind the sales tax was not paid at the time of purchase so you have:

      Payment amount 100
      Expense account 105 <could be asset account
      Sales Tax Payable 5

  • Well written article, this has been very helpful although I use QB Online, and the process seems to be slightly different. I have adjusted and am almost there but cannot find a report that will show the Taxable amount associated with the Use Tax? Any one know how to do this with QB Online?
    Thanks so much!

  • I am in the same boat as Kristy H….
    I have quickbooks online, and it does not let me select sales tax payable under account name? am I doing something wrong or is QuickBooks Online making life hard? thanks

  • For some reason, I just do not get this.
    Where do I enter the NEGATIVE tax amount? I sure can’t do it in “Write Checks” or “Enter Bills” those are all tagged to the vendor. Not the taxing agency.
    Or do I create a new COA account just for Use Tax?

    • Dave H, I do use the “Enter Bills” to add my negative tax amount. You’re right it does assign the vendor to the entry, but I then go into the “Sales Tax Payable” account and manually type over the vendor name to the taxing agency name I need. It will not change the vendor name on your bill entry but will add it to the listing for “Pay Sales Tax” under the tax agency name. Very slick!

  • Doug,
    On your original post,

    When you make a purchase for $100 in taxable office supplies (but tax is not charged), record the purchase by assigning $105 to the expense account (office supplies) and -$5 to Sales Tax Payable. In the “name” column of the Sales Tax Payable line, enter your sales tax agency.

    Is the “name” column the Customer:Job column? If not, to what Name column are you referring?

    • Yes, use the Customer:Job column. On some forms it’s called the “name” column, and on others it’s called the “Customer:Job.”

      Of course, we’re putting a VENDOR name into that column, so it seems to not make sense, but this is in fact what we want.

      Also, it’s fine to split the expense between Office Supplies and “Use Tax Expense.” Even better because that allows you to do a report later when you want to see how much use tax you’ve paid. You need to have that figure for the sales tax return.

      • My company currently uses Manufacturing and Wholesale 13.0 and it does not allow for us to select a vendor in the “Customer:Job” field of a vendor invoice. Is there a setting in preferences that needs to be changed?

        • Well, you can’t expect to find a vendor in a field set up for the customer. QuickBooks keeps them separate. Best you can do is to add the vendor as a customer – but that creates a number of situations that I don’t like.

  • Do you have a workaround for QBO? When you try to post to sales tax, you get “you have either selected a tax liability account on a transaction where it’s not allowed, or haven’t specified a tax rate along with it.”

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