Before You Start

This guide assumes you have administrator access to Xero and understand basic sales tax principles. You’ll also need access to your external sales tax reports (e.g., Avalara, TaxJar).

Overview

25 min
Estimated Time
Intermediate
Difficulty
Monthly/Quarterly
Maintenance

What You’ll Learn

  • How to identify discrepancies in sales tax reports
  • Methods for correcting transactions with incorrect tax rates
  • Strategies for handling tax-exempt and out-of-scope sales
  • Best practices for reconciling Xero with external tax platforms
  • Tips for maintaining accurate ongoing sales tax compliance

1. Initial Checks

Before diving into specific discrepancies, perform these initial checks:

Key Areas to Review

  • Xero’s Sales Tax Report settings
  • External sales tax platform (e.g., Avalara, TaxJar) report periods
  • Bank reconciliation status in Xero
  • Overall health of Xero integration (if applicable)

Data Points to Compare

  • Gross Sales
  • Taxable Sales
  • Non-Taxable Sales
  • Total Sales Tax Collected

2. Common Mismatch Scenarios

Sales tax mismatches usually fall into these categories:

Scenario A: Incorrect Tax Rate Applied

This occurs when a transaction is assigned the wrong tax rate in Xero.

Pros:
  • Easy to identify in transaction details.
  • Often correctable by editing individual invoices.
  • Xero’s “Tax Rate Waterfall” can prevent future errors.
Cons:
  • Time-consuming for large volumes of transactions.
  • Can affect historical reporting if not caught early.
  • Requires careful review of each line item.

Scenario B: Exempt or Out-of-Scope Sales

These sales are either statutorily exempt from sales tax or fall outside the scope of sales tax collection (e.g., international sales for a domestic tax filing).

Expert Tip: Often, transactions incorrectly marked as taxable (or vice-versa) cause mismatches. Ensure your sales tax settings for specific contacts or items are correct in Xero.

3. Step-by-Step: Troubleshooting Flow

Follow this high-level workflow to pinpoint and correct discrepancies:

Start by identifying the reporting period with the mismatch. Compare your Xero Sales Tax Report with your external platform’s report for the same period. Look for differences in total sales, taxable sales, and tax collected. Drill down into individual transaction details in Xero to find specific invoices or bills where the tax calculation or status might be incorrect. Finally, make necessary adjustments in Xero to align the data, prioritizing current periods and carefully considering the impact on historical reports.

Here is a sample code block to show how a tax reconciliation summary might look.

{
  "tax_report_date": "2024-03-31",
  "xero_tax_collected": 1250.75,
  "external_tax_collected": 1300.20,
  "discrepancy_amount": 49.45,
  "status": "investigation_needed"
}

4. Correcting Discrepancies in Xero

  1. 1

    Review Transaction Details

    In Xero, use the ‘Sales Tax Report’ to drill down into specific transactions for the reporting period that show discrepancies.

  2. 2

    Adjust Tax Rates

    For individual invoices, open and edit the transaction to apply the correct tax rate or status (e.g., ‘Exempt’). Ensure the corresponding tax amount updates correctly.

  3. 3

    Use Journal Entries (Caution)

    For large adjustments or prior periods that have already been filed, consult with a tax professional before making journal entries directly to the Sales Tax Payable account.

Important: Historical Data Integrity

Modifying past transactions can significantly impact historical reports. Always back up your data or consult a professional before making widespread changes, especially for periods that have already been filed with tax authorities.

5. Preventing Future Mismatches

Best Practices Checklist

  • Regularly reconcile Xero with external tax platforms (e.g., monthly).
  • Standardize sales tax settings for common products/services in Xero.
  • Assign default tax rates to contacts or items where appropriate to automate tax application.
  • Periodically review Xero’s ‘Tax Rates’ list for accuracy and ensure unused rates are archived.
  • Train staff on correct tax selection during transaction entry to minimize manual errors.

Need Help?

Expert Xero Tax Reconciliation

Struggling to align your Xero sales tax? Our specialists can help streamline your compliance and reporting, ensuring accuracy and peace of mind.

Contact a Tax Specialist