-Sid

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.

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.

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.

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.

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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.
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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

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?