Changing QuickBooks Sales Tax Rates Mid-Year

You have your sales tax items and rates all set up, you have the sales tax rate selected for each customer, you can generate your reports, you are all set! HOWEVER – what do you do if a sales tax rate changes in the middle of the year? Today I’ll talk about some ways to handle this situation. I am going to assume you understand how to set up sales tax in QuickBooks (see my article on how to set up sales tax in QuickBooks).

A Sample Situation

To illustrate the situation I’m going to create a very simple case.  I’m in Davis, California, and prior to April 1^st I have two sales tax rates to worry about. There is a 7.25% state rate, and a 0.5% city rate. I’ve set up two sales tax item records for each tax, and a sales tax group record for the combination. In my local customer records I specify that they are taxed using the combined rate.

I created an invoice in March for $1000, and the tax that is calculated is $77.50.

Then on April 1^st the state tax rate goes up to 8.25%, and I make a sale in April. The tax that is calculated is $87.50. How do I handle the sales tax rates?

Change the Rate

The simplest approach to a changing sales tax rate is to just edit the sales tax item and change the rate. However, you should not do this. The QuickBooks Help file states that you should not change a sales tax rate for an existing sales tax item, that this can impact reports and existing transactions.

From what I see this is only partially true. I can’t see any effects on existing transactions. If I have an invoice with the old rate, and then change the rate of the sales tax item in the item list, the existing invoice still shows the original rate. That is what I would expect – the rate itself is stored in the invoice, not just the reference to the sales tax item (note that I did not exhaustively test this situation). I still don’t recommend changing the rate this way, though, because of the way this impacts the Sales Tax Liability report.

The report lists the sales tax rate, and so it will only show the current value of the rate. If you look at this report, it looks like you under-collected the California tax – 8.25% of $2000 should be $165, not the $155 shown here. For your tax reporting you will need to show the amount that was taxed at the old rate, and the amount that was taxed at the new rate. So, although the invoices are correct, your sales tax liability report is incomplete.

Update the Sales Tax Group

In my example I created a sales tax group item for the actual tax that I’m going to charge my customers. In California I need to do this, because I have to show the separate amount collected statewide and per individual tax district.

Instead of changing the tax rate for the California Base Tax, I will add a new California Base Tax sales tax item for after April 1^st, with the new rate.  I’ll change the name of the original rate to note that it is for the first quarter, and the new rate item will have a name that differentiates it from the other. Then I will edit the sales tax group item to use the new rate instead of the old rate.

 As you can see, now the report properly separates the sales by the different rates for different times of the year.

This is a simple change to make. Another big benefit – because each of my customers were assigned a sales tax group item (rather than a sales tax item) I can make the change to the rate, but I don’t have to go into each customer record and change them to use a different rate. This keeps the amount of work to a minimum and makes it less likely that I’ll have an error due to overlooking a customer.

If You Aren’t Using Groups

In some cases you may not be using sales tax group items. Perhaps you have a locale where you don’t have multiple combined sales tax rates. Perhaps you didn’t set up your sales tax system to use groups in the first place, and only have one sales tax item with the final rate.

You still want to make a new sales tax rate item rather than changing the existing item’s rate, so that you get the proper reporting as shown above. However, now you have a situation where you have to change the default sales tax rate item in every customer record, which can be time consuming.

However, there is a trick that can make this a simple chore. My thanks to Intuit Community member “Onceagain”, who pointed this out to me in a forum discussion.

You will create your new sales tax item with the new rate. Then, in the item list, make the OLD rate inactive. Note that even though it is inactive, it will still show in the sales tax liability report if there are values accrued to this item.

Now, when you invoice a customer that used the old rate, a warning will pop up:

Click on “use it once”, but then in the invoice switch the tax item to the correct, new item or group. For most people, QuickBooks will open a window telling you that you changed the tax item and asking if you want to update the customer record.

What this means is that by making the sales tax item inactive you will be warned the next time that you invoice a customer using that item, and you can update the customer record at that time. This saves you from having to go back through all of the customers to change the rate.

Note that you won’t get the “name information changed” warning if you have turned off this preference (under General preferences, in the Company Preferences tab). In this case, when you are asked if you want to use the inactive rate, you have to change the rate in the customer record yourself.