Simplify Sales Tax Collection with Office Accounting

By David H. Ringstrom, CPA

You may not need this article if you live in Alaska, Delaware, Montana, New Hampshire or Oregon. But residents in the remaining states should keep reading, as your state collects some type of sales tax. Your firm may not be required to collect sales tax on the services you provide, but many of your clients are likely required to collect and remit sales tax to their respective state government. In this article I’ll cover sales tax in Office Accounting from top to bottom, so you’ll know exactly how to advise your clients.

Enable Sales Tax

The first step is to enable the sales tax option  in Office Accounting:

1. Choose Company, and then Preferences.
2. As shown in Figure 1, click the Do You Pay Sales Tax? checkbox, and then make a choice between accrual and cash. Accrual-based taxing jurisdictions require payment of sales tax when the invoice is sent to the customer, while cash-based jurisdictions allow sales tax to be paid when the customer has paid their bill.

Figure 1: You can instruct Office Accounting to track sales tax on customer transactions.

Important: The choice of cash or accrual for sales tax purposes does not affect the option of running financial reports on cash or accrual basis.

3. Although you could click the Tax Groups button and begin the process of setting up tax groups and codes, click OK to close the Preferences dialog box for now.

Explore the Sales Tax Menu

You’ll use the Sales Tax choice within the Company menu to do much of the configuration. This menu includes these choices:

·         Manage Sales Tax Groups: Sales tax groups are comprised of one or more sales tax codes. Customers are assigned to a sales tax group.

• Manage Sales Tax Codes: Sales tax codes enable you to track the individual elements of a sales tax rate. For instance, an 8% sales tax rate may be comprised of a state sales tax, plus one or more local sales taxes. Creating a sales tax code for each element of a sales tax rate can simplify filing sales tax returns.
• Manage Item Tax: You’ll assign an item tax code to each inventory item. Office Accounting provides the two that you’ll most likely need, Taxable and Non-Taxable, but you can add others if needed.
• Pay Sales Tax: Use this menu choice to remit sales tax due to your taxing authority.
• Adjust Sales Tax Due: From time to time you may need to adjust the sales tax amount due. For instance, Georgia permits businesses to retain 3% of the sales tax amount due as vendor compensation.
• View Sales Tax Liability: This menu choice generates the same report that is available by choosing Reports, Company and Financial, and then Sales Tax Liability. As shown in Figure 2, the report shows the amount of sales tax incurred during a specified report period.

Figure 2: The Sales Tax Liability report can help you prepare your sales tax return.

• New Tax Agency: Although you may think of a taxing authority as a vendor, you should use this menu choice to establish the agency as a payee in Office Accounting. Doing so enables you to choose the tax agency in the Manage Tax Codes window.

Sales Tax Checklist

Now that you have the lay of the land, let’s continue the process of setting up sales tax in Office Accounting:

1. Establish tax agencies - Choose Company, Sales Tax, and then New Tax Agency. When you save your work, the agency is then available in the Office Accounting Vendor list.
2.  Manage item tax codes - Office Accounting automatically creates taxable and non-taxable item tax codes, so you most likely can skip this step. However, if you can add additional codes:

a.       Choose Company, Sales Tax, and then Manage Item Tax.

b.      Click Add, and then enter a code for the Item Tax, such as Exempt. Indicate whether this tem Tax code is taxable or non-taxable, and then click OK.

3. Apply item tax codes to inventory items - By default, Office Accounting treats all new inventory items as taxable, including service items. If necessary, you can change the Item Tax code for existing items:

a.       Choose Customers, Lists, and then Items.

b.      Double-click on an item in the list, and then change the Item Tax code, as shown in Figure 3.

Figure 3: Inventory items default to taxable, but you can choose another tax code if necessary.

4. Manage tax codes - As discussed above, you use tax codes to establish the individual components of a sales tax rate:

a.       Choose Company, Sales Tax, and then Manage Tax Codes.

b.      Click Add, and then complete the Add or Edit Tax Code form, as shown in Figure 4. Repeat this process as needed for each component of your total tax rates.

Figure 4: Tax codes comprise the individual tax rates within a sales tax group.

Date sensitive: As shown in Figure 4, you can specify “as of” dates for sales tax rates. This means that you can plan ahead for sales tax increases, and not have to worry about taking action on the day that a tax increase begins.

5. Manage tax groups - The next step is to combine individual tax codes into tax groups:

a.       Choose Company, Sales Tax, and then Manage Sales Tax Groups.

b.      As shown in Figure 5, enter a name for the tax group, and then add tax codes to the Selected Tax Codes list. If you find that you’re missing one or more tax codes, click the Manage Tax Codes button to display the window shown in Figure 4. Repeat this process as needed for your sales tax jurisdictions.

Figure 5: A sales tax group is comprised of one or more sales tax codes.

Figure 5: A sales tax group is comprised of one or more sales tax codes.

6. Assign tax groups to customers - By default, Office Accounting assigns a tax group of None to all customers. You may need to edit your customer list to assign the appropriate tax group:

a.       Choose Customers, Lists, and then Customers.

b.      Double-click on a customer, and then click on the Details tab.

c.       As shown in Figure 6, change the Tax Group as needed.

Figure 6: Customers are assigned a default sales tax group of None, which you can override.

Figure 6: Customers are assigned a default sales tax group of None, which you can override.

7. Apply sales tax to transactions - The sales tax process is the same for quotes, sales orders, invoices, cash sales, and credits and refunds:

a.       Choose Customers, New, and then a transaction type, such as New Invoice.

b.      As shown in Figure 7, the Tax Group field completes automatically when you choose a customer, while the Item Tax field fills automatically when you choose an inventory item. Keep in mind that you can override the defaults for either field when necessary.

Figure 7: Transaction windows prefill the tax group and item tax fields based on your customer and item selections.

Figure 7: Transaction windows prefill the tax group and item tax fields based on your customer and item selections.

8. Review sales tax liability - Choose Company, Sales Tax, and then View Sales Tax Liability to display the report shown in Figure 2.

Cash vs. accrual: The report will display using the accounting method that you specified in Company, Preferences, and then the Cash vs. Accrual section of the company tab. This may differ from the basis that you’re required to pay sales tax, so change the accounting method in the upper left-hand corner of the report screen if necessary.

9. Adjust sales tax liability - You may be able to skip this step, but if warranted, you can adjust the sales tax liability:

a.       Choose Company, Sales Tax, and then Adjust Sales Tax Due.

b.      Complete the form, and then click OK.

10. Pay sales taxes - Be sure to pay sales taxes through the Sales Tax menu. If you write a check directly through the Vendors or Banking menu then Office Accounting will not be able to properly apply your payment against your sales tax liability, which can in turn cause your tax liability report to be out of kilter with your balance sheet. Here’s how to properly remit sales taxes:

a.       Choose Company, Sales Tax, and then Pay Sales Tax.

b.      Select an account to pay from, as well as a payment method.

c.       You can optionally choose a tax agency from the Filter section if you want to limit the list to amounts due to a particular agency.

d.      Select the bills that you want to pay, and if necessary, adjust the amount to pay.

e.       Click the Issue Payment button on the toolbar.

f.       Click OK when prompted to save the form.

g.      Confirm the starting check number, and then click Print to generate the sales tax payment. If you click Cancel, the check will be added to the Payment List so that you can print it later. You can access this list by choosing Vendors, Lists, and then Vendor Payments.

The views and opinions expressed in this column are those of the author and do not necessarily reflect the opinions of Microsoft.