What is the correct procedure to record a customer deposit (or prepayment towards an invoice) for a cash based business in order to correctly record sales tax?

Upfront prepayments are income for a cash basis entity, one that is not allowed to carry liability.

Prepayments that are taxable when you get them are also taxable when put on a credit memo to apply them (creates a negative sale and reversal of tax). Or, it is Not Taxed when you get it and Not Taxed when you use it to apply to the actual sale.

Putting it on a Sales Receipt = the date of this sale, just like any sale you report for Sales and sales taxes.

Income for sales tax purposes is ALWAYS reported in accrual basis, so it's irrelevant if you're cash basis.

Now, in your case, Since it is merely a deposit and not yet invoiced there's no sales tax due. So what you need to do is:

A. Create a Sales Order

B. Only use the following method to record customer deposits:

1. Use the "Make Deposits" screen to record deposits and make sure you choose your Customer deposit account (Liability) OR;

2. Use Journal entry: Debit Cash, Credit Customer Deposit Account (Liability)

What this will do is increase your liability and cash account, but it will not affect your income nor the "Sales Tax Liability" and "Sales Tax Revenue Summary" report. That means you are not declaring it as income and so you don't owe any sales tax. What a lot of people keep on forgetting is; that there's this "Sales Tax Liability" report in QB under the Vendor menu. If you get audited and they know that you are using qb, this is one of the reports the Auditor will request from you. 

Therefore, NEVER use the "Enter Sales Receipt" screen/template to record your customer deposit.  Although it is true that it will not show as income in your Profit and Loss Statement, it will certainly show as Sales income under the "Sales Tax Liability" report. This is what I've learned from programming my client's QB in the past 15 years. 

I hope this helps. Good luck!

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