How to Add Tax Exemptions in Sage 50

Managing sales tax correctly is one of the most important responsibilities in accounting and bookkeeping. While most sales require taxes to be applied, there are always exceptions—such as nonprofit organizations, government agencies, or resellers purchasing goods for resale. These customers qualify for tax exemptions, meaning that sales tax should not be applied to their invoices.

If you use Sage 50 Accounting, you have full control over how tax exemptions are set up and applied to customers, invoices, and inventory items. With the right configuration, Sage 50 can automatically handle exempt transactions, saving time and reducing the risk of errors during audits.  This guide will walk you through everything you need to know about adding tax exemptions in Sage 50, including how tax codes work, how to set up exempt customers, how to apply exemptions to specific invoices or inventory items, and best practices for compliance and reporting.

1. Understanding How Sage 50 Handles Taxes

Before you can manage exemptions, it’s important to understand how tax structures function in Sage 50.  Sage 50 uses tax authorities, tax codes, and tax groups to calculate and apply taxes to your transactions.

• A Tax Authority represents a taxing jurisdiction (for example, a state or province).
• A Tax Code defines the specific tax rate (for instance, 7% state sales tax).
• A Tax Group can combine multiple tax codes for one transaction (for example, combining state and local taxes).

Every customer and every item can have a default tax code assigned to them. When you create a sales invoice, Sage automatically calculates tax based on these codes. If a customer is tax-exempt, you simply assign a non-taxable code or mark their profile as exempt so that no tax is added during sales.

2. Preparing Your Tax Settings Before Creating Exemptions

Before you begin marking exemptions, you must make sure your tax configuration is correct.

1. Open Sage 50 Accounting.
   From your main menu, go to Maintain → Sales Taxes. This area lets you define and modify your tax authorities, codes, and rates.
2. Verify Existing Tax Authorities.
   Review your list of tax authorities (for example, State Sales Tax or County Sales Tax). Each authority should have a proper description and rate.
3. Review or Create Tax Codes.
   Under the Sales Taxes window, click Tax Codes. This is where you assign a label (like “TX7” or “NONTAX”) and specify the tax rate and authority.
   If you’re planning to use tax exemptions, you’ll want at least one zero percent tax code (for instance, “NON” or “EXEMPT”) to represent exempt sales.
4. Save Your Changes.
   Make sure your normal taxable and non-taxable codes are both available. You’ll need them when setting up customers or transactions later.

3. Creating a Non-Taxable (Exempt) Tax Code

To handle tax-exempt transactions properly, you must create a tax code that represents an exemption. This is a simple but important step.

Follow these instructions:

1. Go to the Maintain menu and select Sales Taxes.
2. Click Tax Codes to open the tax code list.
3. Click New to create a new code.
4. In the Code ID field, type something clear such as EXEMPT or NON.
5. Leave the Tax Rate at 0.00%.
6. Leave the tax authority blank or choose “None.”
7. In the Description, enter “Tax Exempt Sales.”
8. Save the new tax code.

This zero-rate tax code will be used whenever you want to record a sale that is tax exempt. Creating this code ensures your reporting stays consistent and helps you easily identify exempt transactions later.

4. Setting Up a Customer as Tax Exempt

The most common situation for applying exemptions is at the customer level. Many businesses have recurring clients that always qualify for exemption, such as resellers or nonprofit organizations. Sage 50 allows you to designate a customer as tax exempt so that all future invoices automatically exclude sales tax.

Here’s how to do it:

1. Open Customer Maintenance.
   From the top menu, select Maintain → Customers/Prospects.
2. Select or Add the Customer.
   Choose an existing customer from the list or create a new one by clicking New.
3. Go to the Sales Tax Tab.
   Inside the customer record, find the tab labeled Sales Tax (sometimes called “Taxes” depending on your version).
4. Assign the Exempt Tax Code.
   In the field for Tax Code, select the one you created earlier (for example, “EXEMPT” or “NON”). This code ensures that no tax is applied to their transactions.
5. Enter Exemption Details (Optional but Recommended).
   Sage 50 allows you to enter an exemption certificate number or notes in the Customer Notes field. It’s best practice to include:
   • Exemption certificate number.
   • Reason for exemption (e.g., resale, nonprofit, or government).
   • Expiration date, if applicable.
6. Save the Customer Record.
   Click Save and close the window.

Now, any time you create a new invoice for this customer, Sage will automatically recognize them as tax exempt and omit any sales tax calculations.

5. Applying a Tax Exemption on a Single Invoice

There are times when only a specific sale or invoice qualifies for exemption, even though the customer is generally taxable. For instance, a customer might buy both taxable and non-taxable items, or a special transaction may be shipped out of state.

To apply an exemption directly to an invoice:

1. Open the Sales/Invoicing Window.
   Go to Tasks → Sales/Invoicing and create a new invoice.
2. Select the Customer.
   Choose the customer as you normally would.
3. Add Items or Services.
   Enter the products or services being sold.
4. Override the Tax Code.
   On the invoice form, you’ll see a column labeled Tax or Tax Code next to each item. Change this code from your default (for example, “TX7”) to your exempt code (“EXEMPT” or “NON”).
   • You can also remove tax manually by unchecking the taxable option if available.
5. Add a Note Explaining the Exemption.
   It’s good practice to include a note in the description or comments section of the invoice, such as “Tax-exempt sale under resale certificate #12345.”
6. Save or Post the Invoice.
   When you save, Sage 50 will automatically recalculate totals without applying any sales tax.

This method is especially useful for one-time exemptions or mixed-tax situations.

6. Making Specific Inventory Items Non-Taxable

Certain goods or services may always be tax-exempt, regardless of the customer. For example, some labor services or basic food items might be non-taxable in your jurisdiction. Instead of adjusting every invoice manually, you can mark the product itself as non-taxable in Sage 50.

Here’s how to configure it:

1. Go to Maintain → Inventory Items.
2. Select the item you want to edit or create a new one.
3. Open the General or Taxes tab (depending on version).
4. In the Tax Type or Tax Code field, select your EXEMPT tax code.
5. Save the item record.

From now on, every time that item appears on an invoice, it will automatically use the exempt tax code and no tax will be applied.  This approach ensures accuracy across your catalog and eliminates repetitive manual adjustments.

7. Recording Exemption Certificates for Compliance

Tax authorities require businesses to maintain proof of exemption for customers who don’t pay sales tax. Even if your accounting software removes the tax automatically, you must still have valid documentation to support the exemption.

In Sage 50, you can store exemption details directly within customer records:

1. Open the customer’s profile under Maintain → Customers/Prospects.
2. Go to the Contacts or Notes tab.
3. Enter the exemption certificate number and relevant notes such as expiration date and reason.
4. If you want to attach digital copies, use Sage’s Attachments feature (available in newer versions) to upload scanned certificates.

Keeping this information organized ensures that, if you’re ever audited, you can produce documentation quickly.

8. Reviewing and Reporting on Tax-Exempt Sales

After setting up exemptions, it’s important to verify that your reports accurately reflect exempt transactions. Sage 50 includes built-in reports that help you distinguish between taxable and non-taxable sales.

To review exempt sales:

1. Go to Reports & Forms → Accounts Receivable → Sales Tax Report.
2. Choose a date range for your review period.
3. Generate the report to see a breakdown of sales, taxable amounts, and exempt totals.

This report helps ensure that exempt sales are recorded properly and makes your tax filings more accurate. You can also export reports to Excel for deeper analysis or recordkeeping.

9. Handling Mixed Tax Situations

Many businesses sell both taxable and non-taxable goods, or they operate in multiple states with different tax rules. Sage 50’s flexibility lets you manage complex tax scenarios using combinations of tax codes and authorities.

To handle mixed taxes on the same invoice:

• Assign the correct tax code per line item (for example, “TX7” for taxable items and “EXEMPT” for others).
• If you sell across multiple jurisdictions, define separate tax authorities (such as State A, State B) and create codes for each region.
• Always confirm that the correct authority is linked to each customer based on their shipping address.

This setup keeps your transactions accurate and ensures compliance across states or provinces.

10. Common Issues and Troubleshooting

Even when configured correctly, tax exemptions can sometimes cause confusion or reporting discrepancies. Below are some common issues and how to resolve them:

Issue 1: Taxes Still Appear for an Exempt Customer

• Verify that the correct tax code (EXEMPT) is selected in the customer profile.
• Ensure the invoice was created after the exemption was applied. Older invoices won’t update automatically.
• Check each line item to confirm no taxable code is overriding the exemption.

Issue 2: Exempt Sales Missing from Reports

• Make sure you use a zero-rate tax code rather than removing tax manually.
• Check your report filters,   ensure they include exempt transactions.
  

Issue 3: Incorrect Tax Applied for Multi-State Customers

• Confirm that the customer’s tax authority matches their state or region.
• If necessary, create separate customer records for different locations.

By addressing these common problems early, you can keep your accounting records accurate and avoid confusion during tax filing.

11. Best Practices for Managing Tax Exemptions

Applying tax exemptions correctly is not just about preventing overbilling,   it’s about maintaining compliance and audit readiness. Here are a few best practices to follow:

• Always Collect Certificates – Never grant exemption without a valid certificate from the customer.
• Create Clear Naming Conventions – Use consistent, easy-to-identify tax codes like “EXEMPT” or “NON.”
• Regularly Review Customer Records – Check that exemption certificates are still valid and not expired.
• Use Zero-Rate Codes Instead of Removing Tax – Removing tax manually may cause reporting errors.
• Reconcile Tax Reports Monthly – Verify that total taxable and exempt sales match your records.
• Train Staff – Make sure everyone creating invoices understands when and how to apply tax exemptions.

Following these practices ensures accurate reporting, consistent processes, and reduced audit risk.

Adding tax exemptions in Sage 50 Accounting is a straightforward process once you understand how tax codes, customers, and items interact. Whether you’re marking an entire customer as exempt, setting up certain items as non-taxable, or applying a one-time exemption on an invoice, Sage 50 provides all the tools you need to manage these situations accurately.

By creating a dedicated zero-percent tax code, assigning it appropriately, and maintaining proper exemption documentation, you’ll not only simplify your accounting process but also protect your business from compliance issues. Regularly reviewing your tax setup and reports ensures your books remain accurate and ready for tax season.

Tax exemptions are more than just a technical setting, they’re an essential part of responsible accounting. With Sage 50’s powerful configuration options, you can confidently manage exemptions, streamline invoicing, and maintain accurate records that stand up to scrutiny from both clients and tax authorities alike.