If you have ever charged a customer sales tax when you shouldn’t have, you probably learned that correcting the mistake can be tricky. First let me point out a couple of common mistakes people make and why they don’t work.
Mistake #1 – Using the sales tax field alone to issue the credit. Whether you use a customer credit memo or a negative sales invoice, just entering an amount in the sales tax field will cause problems. It will look fine to the customer, and the customer’s balance will be correct, but now your actual sales tax collections and the sales tax liability account won’t agree with your Taxable/Exempt Sales report.
Mistake #2 – Entering a line item on a credit memo (or a negative line on an invoice) in the amount of the tax throws off your income without correcting tax liability or the Taxable/Exempt Sales report.
What You Should Do – To really fix the problem you need to increase your exempt sales, decrease your taxable sales, reduce your sales tax liability and the customer’s balance, all while leaving your overall income unchanged. The only good way to do all of that is to issue a taxable credit in the amount of the original sale and re-invoice it as an exempt sale. There are several variations on how that can be done depending on your exact situation.
You can issue a credit memo and then a corrected invoice if you like, but I prefer to do it all in one transaction. Start a new invoice to that customer, and enter each line as it appeared on the original invoice except as a negative. If you’re using quantities and unit prices, make the line negative by entering a negative quantity. If you didn’t use quantities, then enter a negative amount. Make sure these lines are taxable, just like they were on the original invoice. Usually that means you will enter a 1 in the Tax column. Next enter the same items again as positive amounts (like on the original invoice) but set each line to exempt by changing the setting in the Tax column. When you are done, the balance of the invoice should be equal to the sales tax you are crediting.
If you don’t want to recreate every line from the original invoice and the correcting invoice won’t be sent to the customer, you could just enter one negative taxable line and one positive exempt line on your invoice. Just be sure to use the same GL account on both lines. With this method should not use an item ID. This method works because you are still reducing taxable sales and increasing exempt sales which results in the proper correction to sales tax.
If the problem is that the wrong sales tax code was used on the original invoice, you’ll have to use two separate transactions to make the correction. First issue the credit using the same sales tax code as the original invoice. Then correct the customer’s default sales tax code in Maintain Customers before re-issuing the invoice with the right sales tax code.
