Create a new invoice exactly like original invoice, except use negative quantities (or negative amounts if you don't use quantities on your invoices.) Then enter the same lines again using positive quantities (or amounts) but set each line as tax exempt.

Since the negative lines are taxable and the positive lines are exempt, the result will be a negative invoice (credit memo) for amount of the amount the the sales tax.

The final step is to go into Receive Money and mark both the invoice you just created, and the refund, as paid. If you did everything right it will result in a $0 cash receipt.

But if I do this, where will the overpayment of the tax be 'open'? I need to send the monies back that was paid tax. I have inserted an image showing what I have done with the account so far, but it does not include the payment for the overpayment.

When you issue a check to refund the tax amount, choose a Customer ID instead of a Vendor. This creates a negative amount on your A/R Aging Report. That is what you want. Issue a Customer Credit Memo for the Tax Amount you refunded. In Customer Receipts apply the Refund amount against the credit memo amount, they should be the same therefore the Receipt Amount should be zero.

So, do I do what Stephen C said and then I write a check to the customer and issue another credit memo? Or do I write a check and then issue a credit memo?

Entering the invoice as I recommended will correct your sales tax reports and create a negative balance on the customer's account.

When issuing the refund, as Kim said, choose a Customer ID instead of a Vendor ID. That will show up as a positive balance on the customer's account.

The final step is to go back to Receive Money, enter that customer ID, and check the Pay box next to both of those entries. You'll end up with $0 cash receipt.

Thank you so much for this!