Sales Tax Simplified

It seems like the Dynamics GP forums are alive with sales tax questions lately. So, I thought I might tackle this one in the same manner that I do in the classroom-- by breaking it down in to steps. I treat sales tax as a three step process.

1. Document Default
2. Item or Setup Default (depending on if you are working with Receivables or Sales Order Processing, for example)
3. Tax schedule comparison

So, for this post, we are going to keep it simple and look at taxes in Receivables Management and Payables Management. I promise another post on Sales Order Processing and Purchase Order Processing next week :) But, for now, lets keep it simple.

Let's start with Step 1. There is one key setup that can impact the tax schedule that appears on a document (whether it be Payables or Receivables) by default. In your company setup, Tools>>Setup>>Company>>Company>>Options, there is a setting to Use Shipping Method to Determine Default Tax Schedule.

• If this option is marked, then the tax schedule that appears on the transaction will be dependent on whether the shipping method is a pickup or delivery method (more on this later).
• If this option is unmarked, then the tax schedule that defaults on the transaction will always be the Vendor Address' schedule (on Payables) or the Customer Address' schedule (for Receivables)

Now, let's look at Step 2. Now, Step 2 assumes that in your setup you have chosen Advanced for your tax calculations (Tools>>Setup>>Purchasing/Sales>>Payables/Receivables>>Options) rather than Single Schedule. Single schedule will always charge according to Vendor or Customer Address' schedule without Step 2 or Step 3.

In Step 2, we need to find the setup schedule (in Payables or Receivables). This is the schedule specified for each amount (Purchases, Sales, Freight, Misc, etc) in the setup options window mentioned above. In most examples in training manuals, these schedules are setup to include ALL DETAILS.

So, in Step 3, the schedule from the document (Step 1) is compared to the schedule from setup (Step 2). Details that the two schedules are compared, and only those that exist in both places are calculated.

Easy right? I know, I know..you are probably saying, huh? So, lets look at an example. Let's say that I have the following tax schedules set up:

• MOTAX: Contains the MOSTATE, KCCITY, MOSPEC, and JCKCTY Details which will be assigned to my Missouri based customers
• KSTAX: Contains the KSSTATE and KCKCITY Details which will be assigned to my Kansas based customers
• VALID: Contains the MOSTATE, KCCITY, JCKCTY, KSSTATE, KCKCITY which contains all of the currently valid tax details. I have purposely left off MOSPEC, it was a special tax that was only charged last year in MO and is no longer valid.

I set up my customer ABC AUTO with the tax schedule MOTAX, and I assign KSTAX as the default tax schedule for sales in Company Setup. VALID is specified in my Receivables Management Setup as the tax schedule for Sales.

Let's assume that we have chosen to have shipping method determine default tax schedule. So if I enter a Receivables invoice for ABC AUTO, the tax schedule will default as follows:

• Shipping Method with a delivery type: MOTAX (from Customer Address)
• Shipping Method with a pickup type: KSTAX (from Company Setup)

So, lets assume I use a Shipping Method with a delivery type, so MOTAX defaults. This would then be compared to the VALID tax schedule specified in setup. What is in common?

• MOSTATE, KCCITY, JCKCTY are the only taxes that would be calculated, since MOSPEC did not exist in the tax schedule in Receivables Management setup for comparison

I think of the tax schedule specified in setup as my "control" schedule, containing all valid tax details to be used in comparison against the documents. In many cases, this would be all details. But in some cases, as outlined above, it may be easier to remove a tax detail from the one control/setup schedule than to remove it from all schedules that contain it. This is also a great approach if a tax is only valid (or invalid) for certain portions of the year (think of sales tax holidays).

Please post back your questions or comments or examples to help with the understanding. I promise more next week on distribution. Have a great weekend!

PART TWO

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 :)