I've been having this problem for years. When I run my sales tax report, the security deposit shows in the sales column under non-taxable sales. This confuses my bookkeeper as it is combined with non-taxable rents. It incorrectly ties the liability funds received to the income report for the sales tax to file. So when she fills out the sales tax return, the income is increased by the security deposit, and it is not income at all. Since you must create your invoice from your "ITEMS" list, and the items can only be service, other charge or non-inventory part, it always counts as income. Yes, my item is tied to my main account of the Security Deposit Liability account, but it doesn't solve my sales tax liability report.
