Welcome to the Fit Small Business Xero training course! In this lesson, we’re going to cover how to set up sales tax rates in Xero.

You can follow along on your own Xero account. If you don’t have one already, click here to sign up for a free 30-day trial and follow along below.

To complete this lesson, you can either watch the video below, read through the step-by-step instructions, or do both. Let’s begin!

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Why Is It Important to Set up Sales Tax Rates?

As a business owner, you are responsible for keeping track of, reporting and paying a number of different taxes. If you sell products and services that are taxable, then you are required to charge sales tax to your customers and send the sales tax payment along with the appropriate documents to your state tax authority by the deadline. Most small businesses are on a monthly, quarterly or annual payment cycle.

One of the many benefits of using Xero is that it has everything that you need to stay on top of sales tax. You can use the sales tax lookup feature, keep track of the sales tax you collect from customers and file and pay your sales taxes all from within Xero!

In the next section, we will cover step by step how to set up your sales tax rates in Xero.

How Do I Set Up Sales Tax Rates in Xero?

Follow the steps below to navigate to the Tax Rates set up section.

Step 1 – From the Settings menu select General Settings as indicated in the screenshot below.

Step 2 – Below the Organization section, select Tax Rates as indicated in the screenshot below.

Step 3 – Click on the Edit button to the far right of Tax Rates as indicated in the screenshot below.

Step 4 – Click on the +New Tax Rate button as indicated in the screenshot below.

Step 5 – Complete the fields as indicated in the screenshot below. A brief explanation is provided below.

1. Tax Rate Display Name – In this field, include the name of the tax as you would like it to appear on invoices, purchase orders and reports.
2. Tax Components – If the sales tax includes multiple components (i.e. city tax and state tax) then you want to add each component along with the tax rate for each component. In the example above, the LA County Sales tax is made up of a city tax component (8%) and a state tax component (1.5%).
3. Total tax rate – Xero will combine each tax component to get to the total tax rate that will be applied to all transactions that are subject to this tax rate.
4. Save – Don’t forget to click the “save” button to make your changes.

How Do I Edit/Delete Sales Tax Rates in Xero?

If you ever need to make changes to tax rates or delete them altogether, you can easily do that in Xero. Let’s walk through the steps to edit and then we will cover how to delete tax rates.

Edit Tax Rates

Follow the steps below to edit a tax rate that was set up previously:

Step 1 – From the Settings menu select General Settings as indicated in the screenshot below.

Step 2 – Below the Organization section, select Tax Rates as indicated in the screenshot below.

Step 3 – Click on the Edit button to the far right of Tax Rates as indicated in the screenshot below.

Step 4 – Select the tax rate that you need to make changes to clicking on the tax below the Name column as indicated in the screenshot below.

NOTE: If the tax rate has a picture of a padlock to the left of it (like Sales Tax on Imports, Tax Exempt and Tax on Purchases in the screenshot below), you cannot make any changes to that tax rate.

Delete Tax Rates

• Step 1 – To delete tax rates, repeat steps 1 thru 3 in the Edit Tax Rates section.
• Step 2 – Select the tax rate that you need to delete by putting a checkmark in the first column and click the Delete button as indicated in the screenshot above.
  • NOTE: Similar to editing, you cannot delete a tax rate if it has a padlock to the left of it (like Sales Tax on Imports, Tax Exempt and Tax on Purchases do in the screenshot above).

How Do I Lookup a Sales Tax Rate?

One of the things that sets Xero apart from its competitors is the sales tax lookup feature. If you sell products and services to customers who are located in a different tax jurisdiction, you can use this lookup sales tax feature to find the correct sales tax rate that you need to charge. Xero’s sales tax lookup feature, once turned on, adds an option to the sales tax column of an invoice that allows you to lookup the sales tax rate based on your customer’s address.

By using this sales tax lookup feature in Xero, you can avoid overcharging or undercharging your customers for sales tax. If you undercharge your customers, you will be on the hook to make up the difference when it’s time to remit payment to the tax authority. This can come back to haunt you if you ever have to undergo a sales tax audit.

Follow these steps to turn on the sales tax lookup feature in Xero:

Step 1 – From the Settings menu, navigate to General Settings as indicated in the screenshot below.

Step 2 – Below the Organization section, select Tax Rates as indicated in the screenshot below.

Step 3 – Click on the Edit button next to Sales Tax Lookup as indicated in the screenshot below.

Step 4 – The fields that you need to complete are in the screenshot below along with a brief description.

1. Use Sales tax lookup – Check this box to turn the lookup feature on.
2. Physical address of your business – Enter the address of your business location. If you ship products, this should be the address of the warehouse(location) where you ship products from.
3. States where your business is registered to collect sales tax – Enter all of the states where you currently have customers that you sell products and services to.
4. Terms of Use – Mark this box to accept the terms of using this lookup service provided by Xero’s tax partner, Avalara. Click on the blue Terms of Use link for more details.
5. Save your changes.

Now when you go to create an invoice, you’ll be able to look up the sales tax rate automatically based on the customer’s location as indicated in the screenshot below.

How Do I Run Tax Reports in Xero?

There are two reports that you can run to review your sales tax transactions in Xero: The Sales Tax Summary report and the Sales Tax Audit report. Below, will will show you how to locate the reports and you will find a screenshot along with a brief explanation of each report.

Sales Tax Summary Report

This report shows the sales tax calculated for each rate as well as each tax component.

Follow the steps below to navigate to the Sales Tax Summary Report.

Step 1 – Go to the Reports menu and select All Reports as indicated in the screenshot below.

Step 2 – Below the Tax group, select Sales Tax Report as indicated in the screenshot below.

Here is a snapshot of the Sales Tax Summary Report from our fictitious company, Acme Web Pros Plus:

Sales Tax Audit Report

This report shows the sales tax calculated for each transaction for the period by sales tax rate.

To navigate to the Sales Tax Audit Report, just click on the tab to the right of the Sales Tax Summary tab as indicated in the screenshot below.

Here is a snapshot of the Sales Tax Audit Report from a Demo Company in Xero:

How Do I Prepare & File Sales Tax in Xero?

As we discussed earlier, the sales tax info that you track in Xero can be used to prepare and file your sales taxes. In order to file your sales taxes, you must set up an account with Xero’s sales tax partner, Avalara. Once your Avalara account is set up, you can easily import your sales tax data from Xero to Avalara, then use it to run sales tax reports to help you file & pay your sales tax.

To set up your Avalara account, follow these steps from the Xero dashboard:

Step 1 – Go to the Reports menu and select All Reports as indicated in the screenshot below.

Step 2 – Below the Tax group, select Sales Tax Report as indicated in the screenshot below.

Step 3 – Scroll until you get to the bottom of the report and select the “File Online” button as indicated in the screenshot below.

Step 4 – Follow the on-screen instructions to set up your free Avalara account as indicated in the screenshot below.

Wrap Up

That wraps up the section on how to set up sales tax rates. The next lesson in our Xero Training Course will be how to set up a chart of accounts. In this lesson, we will discuss the importance of the chart of accounts and how to add, edit and delete accounts. To access this lesson or any of the others in the series, click here. For a free 30-day trial of Xero, click the button below.