6
May
2010
Intuit QuickBooks Discount Error Goes Unfixed
Unless you live in a secluded cave in the middle of nowhere, you have undoubtedly heard of a little program called QuickBooks by Intuit. This program comes in a variety of different flavors to suit your personal and/or business needs. This software can be surprisingly simple to use with little to no effort.
In a few cases when I invoice a customer, I will charge them for a product at full price and then a few lines down discount the product to the agreed upon selling price. This helps me to demonstrate the value associated with the services I provide and also allows me to charge more later if the circumstances change. QuickBooks has a special item that is setup for this very discount function.
During my normal day-to-day operations, I received a phone call from a customer that was unable to determine how I arrived at a sales tax figure. Thinking this was a simple error on the customer’s behalf I pulled up the invoice, ran the figures and was shocked when I realized that the math absolutely did not work. Wanting to get to the bottom of this, I asked to call the customer back and began trying to figure the problem out. After working with the problem for a few moments I remembered that my company has a full service plan and decided to call Intuit to report the problem. After jumping through several hoops and being transferred to a level 2 support member, I was told that this was expected behavior. The invoice in question had taxable and non-taxable items on it with the discount appearing at the very bottom of the invoice. She explained that the QuickBooks calculator added all the items up as it went along and when it encountered a discount it treated it as a payment and reduced the previous line items by a percentage.
Let see an example:
Our tax amount will be 8%.
Now we have an item that costs $1 and is taxable: $1 x 8% = $1.08
Another item for $1 that is not taxable: $1 x 0% = $1
A discount of $1 that is also taxable: $1.08 + $1 = 2.08 – $1.08 = $1
Now here is a screen shot from QuickBooks with the same problem:
(Click to enlarge)
As you can see, QuickBooks manages to figure this total to be $1.04. She then explained that the work around to this problem was to add all of the taxable items first, then use the taxable discount and finally add the non-taxable items and a non-taxable discount if needed. I asked if this was going to be improved and was told that I could submit this as a suggestion for a future version as an improvement.
This just goes to show you that you can’t always trust shiny software even if you pay for it and you should always double check your math.
GHTime Code(s): 64a48 nc 08e28
This makes me wonder how many customers had overpaid without noticing the tax problem.
Actually it also makes me wonder how many times I have overpaid for something because I didn’t check the register’s math.
I actually had quite a few that had overpaid, not to mention overpaying the government.
Oh that’s fun.
Just curious and if you don’t mind answering: Do you know how you will/did resolve that with your customers? Can you go back with the governments involved and get credits?
Luckily, this was the first one for the current year and I just moved the discount below the taxable items and then added the non taxable items. The past, issues we’ll call them, have not been fixed and I doubt the government would be very forgiving about this.
Taken from QuickBooks help. I think it explains the “problem”.
How is sales tax calculated for a discounted sale?
When you create a discount item, the way you set it up affects how your sales tax is calculated when you apply the discount to a sale.
[....]
Taxable vs. non-taxable
You can set the discount item to be taxable or non-taxable.
If the discount is taxable, the discount is applied to the taxable line items before the sales tax is calculated. This reduces the amount of sales tax charged to the customer.
If the discount is non-taxable, the discount is applied to the taxable line items after the sales tax is calculated.
What if I need to use both?
There are situations where a taxable discount might be divided between taxable and non-taxable items. In this case, a portion of the discount must appear in both taxable and non-taxable sales. Here are examples of when this can happen:
Dollar amount discounts
If a taxable line item and a non-taxable line item are followed by a taxable dollar amount discount, the discount is divided proportionally between the two line items.
Percentage discounts
If a taxable line item and a non-taxable line item are followed by a subtotal and then a percentage discount, the discount is divided proportionally between the two line items.
Non-taxable discounts
Non-taxable discounts are always placed in the non-taxable sales column and are never split between line items. To calculate the discount amounts:
Add up everything above the discount on the sales form (excluding the discount).
Add up the taxable amount above the discount on the sales form (excluding the discount).
Divide the taxable amount by the whole amount. This is the % taxable.
Multiply the % taxable amount by the discount. This is the taxable amount of the discount.
Subtract the taxable amount of the discount from the total discount to get the non-taxable amount of the discount.
================
Analyzing the example in this case: the discount is applied $0.50 toward each item. Only one of them is taxable, means we have a taxable discount of $0.50 and remaining amount to tax is also $0.50 which gives exactly $0.04. Summarizing, we have $0.50 from one item, $0.50 from the second one after discount, and $0.04 tax from one taxable item after discount.
No need to call IRS
So from your explanation, do you believe that the customer still owes sales tax? If so, you are incorrect and so is your and Intuit’s way of thinking.
Let’s say you are a church and you are purchasing a new audio visual system that will be installed. All parts and materials are taxable and labor is not. Since churchs are able to get all tax paid on purchases back when they file their taxes, they need to be able to explain the sales tax amounts.
Example:
A/V system = $10,000 x 1.08% = $10,800
Labor to install = $8000 non taxable
Discount = -$2000 x 1.08% = -$2160
This gives us a tax amount of $800 – $160 = $640 and a subtotal of $10,000 + $8000 – $2000 = $16,000 for a total of $16,640. Can we agree on this? It’s just math after all.
Now if we use QuickBooks discount method we end up overcharging our customer by $71.11 or 4.44%.
Now let’s move the discount line item above the non taxable line item and the math works! This means there is an incorrect design in the way the discount item was implemented. Like I said above it’s just math. Come on Intuit we can work through this one.
You are misunderstanding what rafalbo is saying.
Here is a detailed explanation
You have one taxable, and one non taxable item. When you apply a discount, taxes are calculated on the discount AFTER it distrubutes PROPORTIONATELY the discounts to the line items. This is the right thing to do in most circumstances.
So here is how it is calculated
Taxable = $10k
NonTaxable = $8k
Discount = $2k
discount split 55.55% to Taxable and 45.55% to non-taxable (Proportionate!)
Therefore, taxable = $10k – $1111.11 (55.55% of $2k)= 8888.889
non-taxable = $8k – 45.55%of $2k = 7111.11k.
Therefore at 8% tax, you will pay 8888.889 + 8888.889*.08 = $9600 on the taxable item
you will pay $7111.11k on the non taxable.
Add them up, you come to $16711.11, the CORRECT amount. That is what QB also specifies.
If this is not how you want to calculate, you can always use a subitem.
You have calculate the tax on the TOTAL discount. That is not correct. Taxation is proportional to the discount on the taxed item
Hope this clarifies it.
Therefore, total = (9k + (9k*.08) + 7k = $16,720
You are calculating tax on the ENTIRE discount. That is wrong. You should be computing tax on the taxable portion of the discount.
QuickBooks lets you calculate it that way if you prefer.
First off @rafalbo, thank you for your comment and I apologize for being abrasive with my reply and not clearer with my intention. I do understand your logic and I agree with your math. However the real question is, what is the intention of the discount item? My intention of a taxable discount item is that it will reduce the taxable items and not the non taxable ones.
Now let’s clarify the events that lead to this blog post. My use of the word “error” came after contacting Intuits support team and being transferred through two levels of support team members. At the end of my conversations with both team members, I was left with what they also called a “workaround” solution, which I have provided here, and told to submit a feature request to address the “problem” in future releases. Now considering that both you and sid are Intuit employees, I don’t have to tell you what a full service plan for QuickBooks Enterprise Solutions costs on a yearly basis. Without arguing over the other benefits of buying this plan, wouldn’t you expect to get a better answer/explanation from at least the second level support tech?
@sid – “This is the right thing to do in most circumstances.”
This is not one of those circumstances in my particular case. This solution also may not be correct with state sales tax laws depending on the situation and interpretation.
So here is what I propose: If a discount item is used, and there are taxable and non taxable items, allow the user to determine which items the discount should apply to. There may also be an option for default QuickBooks behavior that will use the proportional reduction for all items. This approach should cover any and all circumstances that may arrise and allow for greater control of the discount process without having to group the invoice in a particular order.
Let me thank you for taking the time to involve yourself with this blog post. It speaks volumes for Intuit’s staff and the pride you have in your products.
I agree that your support experience could have been better. I am using your experience as an input into improving the process at Intuit.
Thank you for the feedback and candid comments
-Sid