Monday, September 14, 2009

Sales Tax Simplified Part 2

Okay, okay, okay, please feel free to give me a very hard time for the delay in posting part two in our compelling sales tax saga. Last time, we worked through the basics of defaulting and comparing tax schedules for receivables and payables transactions. So, now we can move on to Sales Order Processing and Purchase Order Processing, where inventory items can impact the taxes that are calculated. The examples that follow assume that you have marked to use shipping method to determine default tax schedule in your company setup (as discussed in our previous post). Again, let's look at taxes as a three step process.

1. Document Default
2. Line Item Default
3. Tax Schedule Comparison

So, step one works pretty much the same as it did in our earlier post. However, we need to take it a step further by considering the inventory site, like the following examples (assuming you are registered for inventory) in Sales Order Processing:
  • Shipping Method Delivery: Default tax schedule assigned to Customer's Ship To Address
  • Shipping Method Pickup: Default tax schedule assigned to the Site

Now, although I call this a "document" default, because Shipping Method and Site can vary by line item in Sales Order Processing and Purchase Order Processing, this default actually is stored by line item.

So, what about Step 2? Well Step 2 takes in to consideration the inventory item card (or the Sales Order/Purchase Order Setup when dealing with non-inventory items). There are three possible settings for inventory items for Sales and Purchase taxes:

  • Nontaxable: No tax is ever charged for this item
  • Base on Customer/Vendor: This will charge according to the shipping method
  • Taxable: Specify a tax schedule that represents all possible tax details to be charged on this item, more on this later...

So, let's work through a couple examples. First, let's look at the Base on Customer setting. Let's assume that we have entered an invoice for our customer ABC AUTO. They want all items to be shipped to them (Shipping Method- Delivery) at their Missouri location which is assigned to the tax schedule MOTAX which includes the MOCITY and MOSTATE tax details.

Let's say that ABC AUTO buys two items from us, the first item is a gift basket, BASKETOFUN. BASKETOFUN is set with the sales tax option of Base on Customer. So what does that do? If we were to click the item number expansion arrow for this line in Sales Transaction Entry, we would see the following information being stored in the Sales Item Detail Entry window:

  • Shipping Method: Delivery
  • Ship To Tax Schedule: MOTAX
  • Item Tax Option: Base on Customer
  • Item Tax Schedule: n/a

Therefore, in this example, all details in MOTAX would be calculated. Now, let's shake it up and say that this particular line item changed to a Shipping Method of Pickup. Let's say that this line item is being sold from our NORTH site with the tax schedule NYTAX. We would then see the following in the Sales Item Detail Entry window:

  • Shipping Method: Pickup
  • Site Tax Schedule: NYTAX
  • Item Tax Option: Base on Customer
  • Item Tax Schedule: n/a

So, in this scenario, what taxes would be calculated? All details in the NYTAX schedule would be calculated. Sometimes this scenario is confusing to users, because the item is set to Base on Customers. But what that really means is that the item's taxability is based on the Shipping Method itself, and how the tax schedule defaults.

But, wait, I said that we sold two items right? So let's look at the next item that ABC AUTO bought. They bought our new virtual gift basket, VIRTUALBASKET. Now, some states tax the virtual gift basket, and others do not. So we have set up the VIRTUALBASKET with a sales tax option of Taxable. We have then assigned a special tax schedule to it called VIRTUAL, which includes the taxes that are calculated on virtual products. In our case, let's say that it includes the MOSTATE, KSSTATE, and COSTATE tax details.

If we look at the Sales Item Detail Entry, we would see:

  • Shipping Method: Delivery
  • Ship to Tax Schedule: MOTAX
  • Item Tax Option: Taxable
  • Item Tax Schedule: VIRTUAL

Which taxes would be calculated? Only those that are common between MOTAX and VIRTUAL, in this case the MOSTATE detail would be calculated.

But, let's mix it up and say that the customer has asked that this item be shipped to their California location which is assigned to the CATAX schedule (which includes the CASTATE and CACITY tax details). So, let's look a the Sales Item Detail Entry again with these details:

  • Shipping Method: Delivery
  • Ship to Tax Schedule: CATAX
  • Item Tax Option: Taxable
  • Item Tax Schedule: VIRTUAL

Which taxes would be calculated in this scenario? None, because the CATAX schedule does not have any details in common with VIRTUAL. This is correct, since we said that our item was only taxable by Missouri (MOSTATE), Kansas (KSSTATE), and Colorado (COSTATE) not by California.

So, the Taxable option for items creates the most flexibility when you have items that are taxed in some states and other items taxed in all states (or different states). I have found this comes in to play quite often with technology products, including software downloads, where some states are more aggressive in taxing these items than others.

Clear as mud? Share you questions, hints, etc and I am happy to update the post--from Alaska, where I am this week teaching :)


Unknown said...

A very helpful article Christina... There's a real need for this type of content in the SME/SMB market.

Susan Jaeger

Christina Phillips said...

Thanks! Feel free to share on your site.

Take care,