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Changing Sales Tax Rates in QuickBooks

Dec 29th 2016
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I live in California, and the sales tax rate is going down by 0.25% statewide effective January 1, 2017. I have notified my bookkeeping clients who file sales tax that I will make the rate change in their QuickBooks files, but I realize this is more complicated than it seems. 

To Edit or To Replace?
There are two schools of thought on the preferred method of changing sales tax rates in QB – you can either edit the existing sales tax rate to the new rate, or make the current rate Inactive, and create a new sales tax rate. My preference has always been the latter, as I worked exclusively in QB Desktop, and wanted to preserve the integrity of the sales tax reports, which in my opinion is best achieved by making old rates Inactive and creating new rates as needed. This way, should you need to run a Sales Tax Liability or other report for a previous period, you are seeing what has truly been posted to each sales tax rate, and do not run the risk of muddying data with an edited rate which has been changed mid-stream.

Now that I have over 50% of my clients using QuickBooks Online, I decided to seek more information on editing versus replacing in QBO, and as it turns out, QBO behaves differently than Desktop. Check out this article on Intuit’s website provides, which provides clear information on changing a sales tax rate in QBO, including what happens when you edit a rate and the resulting impact. 

I also decided to confer with a colleague, known in our parts as a true sales tax geek, QuickBooks Pro Advisor Carrie Sheret of Carrie Sheret Consulting in Alameda, CA. Carrie raises some implications I had not even considered, so I will share her comments in full. 

“Once you edit the sales tax rate of an existing Sales Tax Item/Component, that change will impact QBO and QBD in the same way, in two functions: old transactions are not affected by the new rate and new transactions will use the new rate. But QBO and QBD differ in how edits to sales tax rates affect memorized transactions: when you edit the rate of a Sales Tax Component in QBO, the rate used in a memorized transaction is updated, but in QBD memorized transactions do NOT reflect the change; I tested this in QBD 2014.

In any case, a simple change to the rate of a Sales Tax Item/Component, as Intuit recommends, seems like a logical choice. Doing so may work fine for certain businesses, for example a retail business which records a daily sales summary.

However, there are a few reasons why QuickBooks users may want to choose a different method when sales tax rates change.

  • Some businesses have fixed price contracts - in California, the State Board of Equalization (the sales tax authority) allows the Seller to use the old sales tax rate for those transactions. See BOE Publication 9 and Publication 46. Other states may have similar regulations.
  • Some businesses record sales for the current period and quotations for the new period concurrently, so both the 'old' rate and the new rate are needed for use on sales and Estimate/Sales Order transactions. This may happen to product-based businesses: one sale ships today, so the invoice/sales receipt would use the current sales tax rate on the invoice, but another sale will ship after the date of the rate change, so that Estimate/Sales Order would use the new sales tax rate.
  • There are some businesses which require 'retroactive' accounting. These businesses will correct prior period sales transactions and add back-dated transactions well into the following reporting period. This of course is not ideal, yet there are many bookkeepers who have clients like this. In this case, the bookkeeper will need to have both the old rate and the new rate available.

If your client falls into one of the categories above, we recommend that no changes are made to the RATE of the sales tax items or components. If you chose to follow our recommendation and you have Sales Tax Groups or memorized transaction, be sure to edit as appropriate.

I can anticipate so many technical details about editing the old and adding the new - everyone is going to do it differently, such as those who set up Sales Tax Groups versus single rate items. There is also the question of how to rename the old rate item? I've seen many different ways to edit old rates. Each business owner or QB Advisor will have to make their own choice.”

Wow, Carrie, awesome information! Well, here is what I choose to do. For my QB Desktop clients, most of whom have fewer than 10 sales tax rates in their QB file, and no Groups, I will make their old rate Inactive, and set up a new rate, as that is how I learned it from my QB mentor many years ago. As far as I know, there is no global way to change the sales tax rate in each Customer record within QBD. There is always the option to export the Customer list to Excel, edit each rate, then re-import the list to QB. I choose to alert my clients that during the first quarter of the year in particular, they will have to pay attention to each sales form they create, and I suggest they first edit each Customer’s record to the new sales tax rate before creating a sales form.

For my QBO clients, I will edit the existing rates in QBO. And for my QBO client using the Avalara AvaTax app, I will do nothing, as that is what we pay Avalara for – correct sales tax rates and reporting!

We all have decisions to make regarding how we want to approach changes to sales tax for our clients. We haven’t even discussed Point of Sale systems, or other scenarios. Hopefully, you now have some food for thought to help make your own decisions. Please feel free to share your thoughts and comments. Many thanks to Carrie Sheret for her insightful input on this topic!

Jody Linick is an AIPB Certified Bookkeeper and a QuickBooks® Certified Pro Advisor.  Her company, Linick Consulting, specializes in remote bookkeeping services using hosted QuickBooks and QuickBooks Online.