A client has several items on an invoice to a customer. Some of the items are taxable, and some are not. They mistakenly applied sales tax to all the invoice items. The invoice was paid in full, and the error was discovered later.
Assuming that the period in which they discovered the error was later than the period in which the sales tax return was due on the original invoice, and that the company is on a cash-basis accounting system, here's a nice little QuickBooks trick that will come in handy.
This trick will avoid having to create an amended sales tax return.
1. Create a credit memo to the customer for the current date.
• Use the invoice item you mistakenly placed too much tax on (i.e. the invoice item, such as "consulting services").
• Apply the amount that, when taxed, will create the amount of tax you want to adjust.
• Apply the sales tax immediately after this line or make sure the sales tax column says taxable for the correct sales tax rate.
• Next, create another line with the exact same invoice item for the negative value of the exact same amount.
• Make this item non-taxable.
• Make notes as appropriate so we don't forget that this was for a year from now.
• Save the credit memo.
• As you save it, the system will ask you if you'd like to "retain a credit" or "give as a refund". That's up to you whether you want to issue a check or apply the credit on the next payment.
2. Print your credit memo (it will be available in your print queue if you checked "print" on the form).
3. If you opted to refund with a check, print your check. If not, apply the credit as normal upon the next payment.
Here's the net effect of this method:
• Your income account will be a pass-through, with $0 change for the credit memo.
• Your sales tax report will show both the positive and negative offset, but will also be a net change of $0.
• Your sales tax liability will be reduced by the sales tax amount refunded for the next sales tax filing.
• If you opted for the refund check, no change to A/R. However your cash account will be lower by the amount of the refund.
• If you opted to retain a credit, your A/R will decrease by the amount of the credit, as is customary for any credit memo. For the future: Make sure you group the taxable invoice items first before applying the sales tax. Make sure your non-taxable invoice items are after the sales tax line item.