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Tracking Use Tax on Purchases in QuickBooks

I 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.