Sales Tax Automation

Sales tax is a consumption tax collected from customers at the point of sale and remitted to federal or provincial agencies. In Canada, each province has its own tax structure and rates. The tax you collect depends on where your business operates, where your customers are located, the goods or services you sell, the provinces where you’re registered, and whether your customers qualify for exemptions (such as resellers, non-profit organizations, or government entities).

Sales tax varies across provinces, with different types such as GST, PST, and HST. Some goods and services are taxable, while others are exempt or zero-rated. To simplify this, you can use Sales Tax Automation, which determines and applies the appropriate tax for your transactions.

When you enable Sales Tax Automation in Zoho Books and provide the required details, the system automatically calculates the correct tax and identifies valid exemptions, helping you stay compliant with ease.

Note: If you already have an Avalara account, you can integrate it with Zoho Books and use it for automated tax calculations. Learn more about Avalara AvaTax Integration.

How Sales Tax Automation Works

Zoho Books calculates the right sales tax for each transaction based on:

Where your business operates and where it is registered for tax and liable to collect sales taxYour customers’ billing or shipping addresses.
The tax category of the goods or services you sell.
Any applicable customer exemptions, such as resellers, non-profit organizations, or government entities.

Choose the Right Sales Tax Approach

Choose how you want to handle sales tax for your transactions in Zoho Books. You can automate it or do it manually, based on your business requirements. To do this:

Go to Settings.
Select Taxes under Taxes & Compliance.

On the Taxes page, you can either set up Sales Tax Automation or calculate taxes manually.

Calculate Tax Manually

If you know which tax is applied to every sales transaction, you can choose to apply taxes manually. To do this, you need to add the required tax rates in the Taxes module, and then apply them to your transactions. This works best when:

You sell limited goods or services in a few provinces of Canada where the tax rate is the same.
You rarely handle tax-exempt customers.
You prefer to update tax rates yourself whenever the law or regulations change.

If you choose to manage taxes yourself, click Manage Taxes Manually at the bottom of the Taxes page.

Set Up Sales Tax Automation

If you want to automate tax calculation for every sale in Zoho Books instead of applying taxes manually, you can enable Sales Tax Automation. This works best if you sell across multiple provinces in Canada where tax rates vary, offer goods or services with different tax treatments, want tax rates to update automatically when regulations change, or work with tax-exempt customers such as resellers, nonprofit organizations, or government entities. To enable Sales Tax Automation in Zoho Books:

Go to Settings.
Select Taxes under Taxes & Compliance.
Click Set Up Sales Tax Automation.

In the next page, under Terms and Conditions, read the terms and check I agree to the terms and consent to share the necessary data with Avalara for tax calculation.
Click Enable & Continue. Sales Tax Automation will now be enabled in your Zoho Books organization.

Under Verify Organization Address, check your Address. Ensure the details are correct, as Zoho Books uses your business address to determine the right sales tax. You can edit the fields directly.
- Once done, click Verify to confirm and validate the address for accurate tax calculation.
- If your organization’s address is invalid, edit the address and verify it again.
- Once verified, click Save & Continue.

If you edit the address, choose whether you want to update it for new transactions or for all transactions in the Update Organization Address pop-up.
Under Tax Agency Mapping, map your Existing Tax Agencies to System-Recognized Tax Agencies. Each existing agency can be mapped to only one system-recognized agency. Once mapped, the existing tax agency will be updated and used for new transactions, while unmapped agencies will no longer be used after tax automation is enabled.
Once you have completed the mapping, click Save & Continue.

Note: Ensure you map the mandatory tax agencies, as they may have tax returns recorded.

Under GST/HST Registration Details, Zoho Books will prefill the Jurisdiction (Tax/State) and Tax Registration Label. Enter the following details:
- Tax Registration Number: This is your business’s official GST/HST registration number issued by the Canada Revenue Agency.
- Tax Registration Date: This is the date on which your business became registered to collect GST/HST with the Canada Revenue Agency.
Click Save and Continue to proceed with the tax automation setup.

Under QST/PST Registration Details, Zoho Books will check whether your business requires a separate registration to collect QST (Quebec Sales Tax) or PST (Provincial Sales Tax) based on the province linked to your organization’s address. If your organization is registered to collect these provincial taxes, Zoho Books will prefill the Jurisdiction (Tax/State) and Tax Registration Label.
- Tax Registration Number: This is the registration number issued by the respective provincial tax authority for collecting QST or PST.
- Tax Registration Date: This is the date on which your business became registered to collect the provincial tax.
Once done, click Complete Setup to finish the tax automation setup.

Configure Address Preferences

When Sales Tax Automation is enabled in Zoho Books, it calculates sales tax using the customer’s billing address by default. You can change this to use the shipping address instead. Here’s how:

Go to Settings.
Select Taxes under Taxes & Compliance.
Navigate to Tax Automation Settings under the Taxes pane.
In the Tax Automation Settings page, click the Edit icon under Address Preference.
In the Address Preference pop-up, choose either Use Billing Address or Use Shipping Address based on your preference.
Click Save.

The address preference will now be applied automatically when calculating sales tax for all new transactions.

Configure Address Preferences for Recurring Transactions

Address verification for recurring transactions is optional by default, but you can make it mandatory to ensure accurate tax calculations. When enabled, recurring transactions can be created only after the customer’s address is verified, as the address determines the applicable tax. If the address needs to be updated, the user may require permission to edit the customer’s address. To configure address preference for recurring invoices:

Go to Settings.
Select Taxes under Taxes & Compliance.
Navigate to Tax Automation Settings in the Taxes pane.
On the Tax Automation Settings page, slide the toggle next to Address Verification Preference for Recurring Transactions.

The selected address preference will now be applied automatically to recurring invoices when calculating sales tax.

Configure Fallback Tax Rates

You can configure fallback tax rates to ensure taxes are applied to transactions generated from recurring profiles when tax automation is unavailable, especially for provinces where you have tax registrations. To configure:

Go to Settings.
Select Taxes under Taxes & Compliance.
Navigate to Tax Automation Settings in the Taxes pane.
In the Tax Automation Settings page, click the Gear icon next to Fallback Tax Rates.
In the Manage Fallback page, select the Province and Tax Name for which you want to create a fallback tax rate.
Click + Add Fallback Rate to add another province’s fallback rate.
To remove a fallback rate, click the Delete icon next to it.
Click Save.

Once configured, the fallback tax rates will be automatically applied to recurring transactions when tax automation is unavailable.

Configure Exemption Certificates

An exemption certificate is a document provided by a customer to show that they are not required to pay sales tax on certain purchases. Customers such as resellers, non-profit organizations, or government agencies may qualify for this exemption under tax regulations. You can configure exemption certificates for customers so that eligible transactions can apply tax exemption based on jurisdiction rules.

To configure exemption certificates for a customer:

Go to Sales on the left sidebar and select Customers.
Select the customer for whom you want to configure the exemption certificate.
On the customer’s details page, click the More icon and select Exemption Certificates.

Click Add New in the top-right corner.

In the Create Exemption Certificate page, fill in the following fields:
- Exemption Category: Defines the reason for the tax exemption.
- Province: Specifies where the exemption applies.
- Tax Agency: Identifies the agency responsible for the tax.
- Tax Exemption: The specific tax exemption applicable to this customer.
Enter the other necessary details and click Save.

Once the certificate is saved, it will be validated and applied to transactions based on the jurisdiction rules.

Note: Tax may still be applied if the item’s Tax Category is not eligible for the exemption according to the jurisdiction rules.

Automate Sales Tax Calculation

Create Items

When you create an item, the Tax Category field lets you categorize goods and services that you sell. When you include an item in a transaction, the tax category associated with it determines the right sales tax based on your customer’s billing or shipping address and your tax registrations.

To add a tax category for an item:

Go to Items on the left sidebar and select Items.
Click + New in the top right corner.
In the New Item page, enter the required details.
Click the Search icon next to the Tax Category field.

In the Search Tax Category pop-up, search and select the appropriate tax category based on the item type.

Enter the other necessary details and click Save.

The item will be created, along with the tax category.

Record Transactions

When you create a sales transaction in Zoho Books, the sales tax is automatically calculated based on your business’s tax registration in the respective province, the customer’s billing or shipping address, and the tax category of the line items. Here’s how:

Go to Sales on the left sidebar and select the transaction you want to create (for example, Invoices).
Click + New in the top right corner.
In the New Invoice page, select the required customer. Their billing or shipping address will be displayed. If you haven’t verified the address while creating the customer, click Verify Address.
- If the address is invalid, click the Edit icon and update the billing address. Once done, Verify Again.
In the Tax Mode field, select whether you want to automate tax calculation or handle it manually.
- In the Item Table, select the items to include in the transaction. If a line item already has a tax category and Automated is selected in the Tax Mode field, the tax will be calculated automatically.
If the selected item does not have a tax category, add one. You can also update the tax category of the line item, if required.
Enter the other required details.
Click Save and Send or Save as Draft and send it to your customer later.

The transaction will be created.

View Tax Calculation Details

When you create a transaction, sales tax is automatically calculated based on your business’s tax registration, the customer’s billing or shipping address, the tax category of each item, and whether the item is taxable. This ensures accurate tax calculation on every transaction.

To view this information:

Go to Sales on the left sidebar to create a transaction (for example, Invoices).
Click + New in the top right corner.
In the New Invoice page, fill in the required details.
In the Total section, click Tax Calculation Details.

In the right pane that appears, you can view how taxes are calculated for the respective transaction.

Manage Tax Registrations

Add Tax Registration Details

Once sales tax is set up, taxes are applied automatically based on your active registrations. You can add any additional registrations as needed, and a tax agency will be created or an existing one will be used accordingly. To add tax registration details:

Go to Settings.
Select Taxes under Taxes & Compliance.
In the Taxes pane, click Tax Registration.
Click + New Tax Registration in the top right corner.
In the New Tax Registration Settings pop-up, fill in the following fields:
- Jurisdiction Tax/State: This indicates the province where your business is registered to collect tax.
- Tax Registration Label: This is the label used to identify your provincial tax registration in Zoho Books.
- Tax Registration Number: This is the registration number issued by the respective provincial tax agency for collecting tax.
- Tax Registration Date: This is the date on which your business became registered to collect the provincial tax.
Click Save.

The tax registration details will be recorded.

Deregister Taxes

If you no longer conduct business in a province, or if you’re no longer required to collect taxes there, and have deregistered taxes there, you can mark it as deregistered in Zoho Books. This prevents sales tax from being automatically calculated for your transactions in that province in Canada. Here’s how:

Go to Settings.
Select Taxes under Taxes & Compliance.
In the Taxes pane, click Tax Registration.
Hover over the required tax registration, click the dropdown icon next to it, and select Edit.
In the Edit Tax Registration Settings page, click Mark as Deregistered in the top right corner.

The tax will be marked as deregisterd.

Undo Tax Deregistration

If you resume your business in a province, or if you’re required to collect your taxes there, you can undo the deregistration to ensure that sales tax is calculated correctly. To do this:

Go to Settings.
Select Taxes under Taxes & Compliance.
In the Taxes pane, click Tax Registration.
Hover over the required tax registration, click the dropdown icon next to it, and select Edit.
In the Edit Tax Registration Settings page, click Undo Deregistration in the top right corner.

The tax details will now be included in your transactions, and the sales tax will be calculated accordingly.

Mark Tax Registrations as Inactive

If you want to temporarily prevent a specific tax registration from being applied to transactions, you can mark it as Inactive. Here’s how:

Go to Settings.
Select Taxes under Taxes & Compliance.
Navigate to Tax Registration in the Taxes pane.
In the Tax Registrations page, hover over the required tax registration, click the dropdown icon next to it, and select Mark As Inactive.
In the confirmation pop-up, click Mark As Inactive again.

The tax registration will be marked as Inactive. To mark it as active again:

In the Tax Registrations page, hover over the inactive tax registration, click the dropdown icon next to it, and select Mark As Active.
In the confirmation pop-up, click Mark As Active again.

The tax registration will be marked as Active.

Exception Report

Sales Tax Automation in Zoho Books calculates taxes using the available transaction details. When required information is missing or tax is applied manually, those transactions are flagged as exceptions and listed in the Exception Report for review, along with the reason.

The report includes:

Transactions calculated with incomplete tax details.
Transactions where tax was applied manually despite automation being enabled.

To view the report:

Go to Reports on the left sidebar.
Select Exception Report under Activity.

By reviewing the Exception Report regularly, you can identify transactions that require attention and ensure that sales tax calculations remain accurate and compliant.

Disable Sales Tax Automation

If you no longer want to use Sales Tax Automation, you can disable it and manage taxes manually. Next, create tax rates in the Taxes module and apply them to your transactions. Once disabled:

You can still view your existing tax registrations, but they will not apply to new transactions.
You must manually ensure that the correct taxes are applied to your transactions.
For recurring transactions recorded before switching, ensure that the correct sales tax is applied to any child invoices generated.

To disable Sales Tax Automation:

Go to Settings.
Select Taxes under Taxes & Compliance.
Navigate to Tax Automation Settings in the Taxes pane.
Click Disable next to Sales Tax Automation.

In the confirmation pop-up, click Disable.

Sales Tax Automation will now be disabled in your Zoho Books organization.

Was this document helpful?

Yes