Hey Snowman, I figured it out because I've been wondering the same thing lately.
Here's what I found out:
1. The sales tax liability tool only reports non-taxable sales according to customer. It does not report non-taxable sales if only a line item is deemed non-taxable. Even in the suggestions to use the non-taxable detail report filter for product, it still only reports non-taxable according to customer.
2. I created a customized report to show any items sold during the period that were not taxable. Basically, I customized a transaction list to show invoice transactions with the A/R paid column and the Taxable amount columns. This allowed me to see any transaction lines that were not taxed. It's not super tidy, but it does the job. If I add the total sales in my sales tax liability report with the total of line items not taxed from this report, I will balance with my P&L report.
3. Now, that being said, the only reason I need this is because my firm's client is not charging correctly for their industry. In Washington State, services performed where you manipulate a tangible object (construction, repair, or cleaning) are taxable. In fact, all items and services are taxable. I assume all sales tax laws must be similar since QB has set up the tax liability tool in this way. If you are a service company that does not manipulate an object (doctor, lawyer, real-estate, etc.) Then you would not need the tool. Perhaps, while setting up the company in QBO, if you specified you sell both products and services, it would be different. Haven't had a chance to find out yet.
