How do I record Use Tax that I pay on purchases from an out of state vendor?

by Reesa McKenzie on December 2, 2011

in Small Business Taxes,Vendors and Payments,Video Tutorials

If you live in a state that has sales tax and you purchase items online or from an out of state vendor that does not collect the tax, then you must report and pay this tax to your state. There are several ways to record this in QuickBooks and this is the one I like best:

First, create an Other Current Liability account in your chart of accounts:

  • Ctrl+A to quickly open the Chart of Accounts or go to Lists > Chart of Accounts
  • Ctrl+N to quickly open the Add New Account window or right click and choose New
  • Choose Other Account Type, then Other Current Liability and in the next window name the new account Use Tax Payable

Next, when you receive the bill to enter or are writing a check:

  • Fill out the top portion of check/bill form with vendor, bill, and amount due.
  • In the bottom portion, select the expense account you are coding the purchase to.
  • In the amount column, enter the amount of the bill, then press the * (times) sign on keyboard to bring up the in-field calculator, enter the calculation to increase the amount by the use tax. If your state charges 6% use tax, then enter * 1.06. If your use tax rate is 8%, you would enter *1.08.
  • Tab down to the next blank line, enter the Use Tax Payable account.
  • The amount column should pre-fill with the difference between the amount you entered in the top portion of check/bill and the amount you entered on the first line. This should be a negative amount, and the amount of the use tax due to your state. If the amount does not pre-fill, enter the use tax amount as a negative (use the = sign to pull up the in-field calculator).
  • In the memo column, enter the original amount that you are calculating the use tax on, this is helpful if your state reporting form requests the total purchases subject to use tax.

Finally, if you pay the use tax at the same time and on the same check as you pay sales tax:

  • Run a quick report on the Use Tax Payable account for the time period you need. Add up the total purchases subject to use tax as recorded in the memo field if needed for your reporting form.

  • Run the Pay Sales Tax routine as you normally would to pay sales tax due. Click on the Adjust button.
  • In the Adjust Sales Tax window, choose the Use Tax Payable as the adjustment account, select Increase Sales Tax, and enter the amount due from the quick report.
  • After closing this window, you will need to check mark the sales tax line and the adjustment line, then create the payment.

Click the pictures to enlarge.

I hope this has helped! I would love to hear from you so leave a comment, ask a question, or just say “Hi”. Please share this or post a review for me: Google or ProAdvisor :)  

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{ 9 comments… read them below or add one }

Hannah Paysnoe July 3, 2014

This was so helpful! Thank you very much for the clear instructions!

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Tre Lopez February 10, 2014

This is great and thank for the help. With that being said, I am wondering if you could help with the problem I have, which is related to this. I have QB 2012 Mfg and Wholesale. I have two main suppliers out of state for a particular product. I would like to configure my use tax for this material, but I do end up selling about 75% of the material and use the remaining 25% of internal consumption used in our services portion of our business. Is there an easy way to QB to calculate this so it would show in a report or in the tax liability report? I do not want to claim 100% of the material, if I sell 75% of it and charge taxes when applicable? Any help would be appreciated.

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Reesa McKenzie February 18, 2014

That is a little tricky….you may have to track the use tax only when you consume the product for your own internal use. Not really an easy automated way to do this and may require some type of journal entry to record the use tax due. I have also on occasion used an “internal use” customer and then “sold” the material to the business at cost to pick up the sales tax and then used a credit memo to adjust out the sale. A little complicated….I might be able to help you with this but it would require an appointment/fee.

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Anne April 27, 2013

Reesa,

This was wonderful! Very clear and a tremendous help. I have a question regarding a service company that has to only pay sales tax in two or three counties. Would this approach to track the use tax work on the invoice side somehow, without truly adding tax to the invoice.

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Jason Burroughs April 23, 2013

This is great! Much better than the one-size-fits-all approach suggested by Quickbooks. They say to create a vendor type of “out of state vendor” and then just run a report on that vendor to know how much to pay. That misses all the times you buy from a vendor both for resale and for your own use; it also doesn’t show how to adjust your sales tax due when combining sales and use tax payments.

The one thing I still need to find is how to categorize the discount (usually a couple of dollars) for a timely payment.

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Reesa McKenzie April 23, 2013

Glad to help! The sales tax discount should go to an other income type account. I dislike seeing these small amounts on the bottom of the profit and loss under Other Income, but technically, it is where it belongs.

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Susan March 6, 2013

Thank you for the detailed description! I’ve been looking all over for this and so glad that I found it.

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Portland bookkeeping February 2, 2012

Great post. Thanks for the help with the software. Getting down to details in the program can be tricky. I’ll be sure to share your blog with those interested in bookkeeping services.

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Reesa McKenzie February 2, 2012

Thank You! I appreciate the comment :)

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