How to Handle Use Tax in Xero

The best way to record Use Tax in Xero is to create a Sales Tax Rate with 0{f4f1c227a9297829d6c2f0b223ad0188fddc4ac1a871d87b426e6cec743bfd5b} rate. Apply this Use Tax Rate to transactions where you are owe Use Tax.

In Xero the Sales Tax Rates are allocated to the Sales Tax Payable (aka Sales Tax Collected) Liability account.

If you created a “Use Tax” rate for a percent over 0%, and then tried to use the tax rate on applicable purchases, this would offset the liability account balance and decrease the liability. As a purchase or spend money transaction with a Sales Tax Rate, would lower the amount “owed.” A Sale, increases the liability, because your customer paid you sales tax, you collected it, and are reserving it until you remit it to the tax authority.

It works great to create a 0% Use Tax Rate, because no amount will hit the Sales Tax Liability account, but it will track all liable purchases into one category, no matter what account from the Chart of Accounts is being used.

When you run the Sales Tax Report, the Taxable purchases are grouped together and then you can easily report how much is owed. Most often when filing a Sales & Use Tax Return, the form will only ask you for the Use Taxable Amount (Total Amount of Purchases that you Owe Use Tax on).

How do you create a 0% Sales Tax Rate? Easy, friends! Follow these step by step instructions:

From the Settings tab in Xero, click General Settings

Click Tax Rates

Click the “+ New Tax Rate” button

For the Name, use something easily identifiable, so you don’t forget what it is. Suggestion: “Use Tax Owed on Purchases (with your tax rate in parenthesis)”

The rate percentage will remain 0{f4f1c227a9297829d6c2f0b223ad0188fddc4ac1a871d87b426e6cec743bfd5b} because we don’t want an amount actually applied, this is just to track it.

Click Save.

Now, when you create Bills or Spend Money transactions in Xero where you are responsible for paying Use Tax, simply select the Use Tax Owed tax rate. When you file your Sales Taxes, run the Sale Tax Report and simply report the taxable amount.