Set Up Tax Schemes

In this process, you will be setting up the tax schemes according to your requirements.

You can configure the tax settings for any business model using Tax Components and Tax Schemes. Tax Components define the various rates and tax rules while the Tax Scheme groups this information and apply to your tax considerations e.g. a specific product, customer type, or district jurisdictions (cities or provinces). Tax Schemes, like most of the setup items, are assigned to class templates that are also infinitely definable.

At the end of this, users will prepare and gather the information, create or import tax rates, and define tax schemes.

Preparing Your Tax Data

To complete this task, do the following:

Before setting your tax schemes in Connected Business, you will need to collect the information for the following:

  • Taxable and non‐taxable products and services.

  • Exempt and non‐exempt expenses.

  • Tax rates from geographical regions to which you deliver orders (e.g. country, region, state/province, and city combinations).

  • Shipping Methods used and if they are taxable.

  • Other taxable items and surcharges.

  • Tax Groups (e.g. Sales Tax, Federal Tax, State Tax).

Decide if you will manually set up the tax rates or import tax rates from an online tax information service.

    1. If you will manually set up the tax rates – collect the latest tax reports and have them either printed or exported into a file. You can also obtain the latest rates from the appropriate tax agencies.

    2. If you will import the tax rates from an online tax information service – download the tax rates from the online service and format the file into an import template used by Connected Business. Fill up the “SystemPostalCode.xls” template. 

       

Determine Tax Rates to Implement and Decide Where Tax Will Be Based On

Decide Where the Tax Will Be Based On

To complete this task, do the following:

Determine the Tax Rates to Set Up

  1. You can implement tax schemes in Connected Business with the following tax rates: 

    Tax Rates Applies To
    No Tax Rate Wholesale items/items for “resale”.
    Items sold online to overseas customers.
    Items sold in places where no sales tax applies.
    Non-taxable products and services.
    Items included in a declared tax holiday.
    Fixed Tax Rate Items sold from a single location where only the local tax rates apply.
    Items that are picked up from your store or warehouse.
    Varying Tax Rates Items sold from different locations where different tax rates apply.
    Items sold online for local customers.

Decide if the Tax will be based on the Customer/Supplier or the Item

Connected Business allows you to choose where you want the tax information to be based on – if on customers/suppliers or items.

  1. Customers/Suppliers – allows you to assign varying tax rates. This is the default setting in Connected Business.

  2. Items – allows you to assign fixed tax rates or tax overrides during tax holidays.
TAX INFORMATION WILL BE BASED ON CUSTOMERS / SUPPLIERS

This is the default setting in Connected Business. To enable tax schemes with varying tax rates e.g. vary per location, you need to enable getting the tax information from the customer/supplier.

  1. If tax information will be based on customers/suppliers, do not change the default preferences and taxation settings in Connected Business. If you need to turn off this setting temporarily:
    • For customers, go to Customer Module > Setup > Preferences > Preferences. Uncheck the Get tax code from the customer option.

    • For suppliers, go to Supplier Module > Setup > Preferences > Preferences. Uncheck the option, Use supplier tax code for line items.

TAX INFORMATION WILL BE BASED ON PRODUCTS AND SERVICES

  1. If tax information will be based on products and services, you will need to turn off the option in the Customer or Supplier Preferences that gets the tax information from customers or suppliers.


  2. Open the item record. Go to Inventory Module > Item > Find Item. Select the item from the list to bring up the Item Detail form.


  3. Switch to the Taxation tab.


  4. To set the item sales tax for customer orders, set the Sales Tax Option to Item. Then, select the sales tax code to apply (e.g. Sales No Tax).


  5. To set the item purchase tax for supplier purchases, set the Purchase Tax Option to Item. Then, select the purchase tax code (e.g. Purchase No Tax).

IMPLEMENT A TAX HOLIDAY FOR SELECTED PRODUCTS

Connected Business allows you to assign unique tax rules or to accommodate tax holidays per product. For example, the state of Texas has a sales tax holiday from August 17– 19. This sales tax holiday can be accommodated by setting a tax override for SampleSalesTax in the items affected and setting the proper dates. When an order is taken for this item between these dates, it will replace the tax scheme SampleSalesTax to Sales No Tax.

    1. If you need to implement a “tax holiday” for a specified period of time, you will need to enable tax overrides from the item. To do this, go to the Inventory Module > Setup > Preferences > Preferences. Turn on the Enable Tax Override option.


    2. Open the item that will be included in the tax holiday. Go to Inventory Module > Items > Find Items. Select the item in the list to bring up the Item Detail form.


    3. Select the sales tax schemes the override.

Set Up Tax Components and Tax Schemes

In Connected Business, you create sales taxes by first creating a Tax Component which details how the tax is to be calculated. Next, you create a Tax Scheme which allows you to combine multiple tax components. This is useful when you need to charge more than 1 tax e.g. State tax, County tax, City tax or GST, PST, HST taxes.

Tax components can be assigned to either 1 of 3 Groups – Tax Group 1, Tax Group 2, or Tax Group 3. This option allows you to group taxes so that different rates can be broken out on the sales documents in accordance with local regulations. For example, Canadian firms may want to consider putting GST into Tax Group 1 and PST / HST into Tax Group 2 so they can be properly broken out on the sales documents. For most U.S. based businesses, the grouping of taxes into multiple groups is not necessary. By default, the sales documents do not break down by sales groups, but total all the taxes. If you need to break down the taxes by group, it can be easily done in the Report Writer.

All examples are for illustrative purposes only. We highly recommend working with your accountant to develop your sales tax strategy. U.S. customers with complex taxation in their jurisdiction may want to consider getting the tax rate from the postal code instead of using a flat rate in the tax component.

For these more complex scenarios, Connected Business can import the sales tax data from www.taxdatasystems.com which allows you to set a different tax rate for each postal code in the system.

 

Set Up the Tax Components

To complete this task, do the following:

Decide If You Will Define Tax Rates (for Fixed Rates) or Import Tax Rates (Varying Tax Rates)

  1. Consider the following before setting up the tax components:
    • Do you use an online tax service?

    • Look at the breakdown of tax rates from your tax reports. Are they broken down by tax type (e.g. State TaxCity Tax), or are tax rates compiled as a whole? If taxes are broken down into different rates, you will need to define each rate as a tax component.

    • Do you have account codes classified by the tax institution e.g. State where you post the different tax rates to?

  2. Decide whether you will define tax components for fixed rates or varying rates.


  3. Set up tax components. Go to the Accounting Module > Setup > Tax > Tax Components to bring up the Tax component form.


  4. In this example, we will create 2 tax components with fixed tax rates and 1 tax component with varying tax rates

TAX COMPONENT WITH FIXED RATES

Let’s say the Texas state sales and use tax rate is 6.25%, but local taxing jurisdictions (cities, counties, special purpose districts, and transit authorities) may also impose sales and use tax of up to 2% for a total maximum combined rate of 8.25%.

  1. Go to the Accounting Module > Setup > Tax > Tax Components to bring up the Tax Component form.


  2. Create the first tax component for the (e.g. Texas State Tax with a 6.25% tax rate).

TAX COMPONENT WITH VARYING TAX RATES

    1. With varying tax rates, the tax components' considerations are as follows:
      1. Serves as a category of different sales tax rates (e.g. State Tax or City Sales Tax).

      2. Determines the tax group that further classifies the tax rates (e.g. Group 1 = Sales Tax Component, Group 2 = Federal Tax Component) 

      3. Determines where the tax will be applied [e.g. Cost (for supplier purchases) or Overall Price (for customer orders)]

      4. Determines where the tax rate would come from (e.g. flat rate or postal code rates)

      5. Determines where the tax amount will be based on (e.g. percent of sales and purchases)

      6. Determines the range of the taxable amount (e.g. non-taxable if more than $100)

      7. Determines the accounts where the tax amounts will flow into (e.g. Sales Tax Payable). While sales tax can have a common account code, you may define additional account codes (can be classified by the tax institution that you are paying back the amount to).


    2. To create tax components, go to Accounting Module > Setup > Tax > Tax Components. The Tax Component form will be displayed.

 

Tax Schemes

  • Groups the different tax categories and labels tax schemes by jurisdiction (e.g. by customer, product or geographical area)

  • Determines if tax rates will be applied to sales or purchase tax

  • Assigned to default class templates – Sales Tax to Ship To Class Templates (applied to new customers) or Item Class

  • Template (applied to new items) and Purchase Tax to Supplier Class Templates (applied to new suppliers)

Ship to Class Templates

  • Determines tax schemes that will be applied to sales, shipping, or other charges.

  • Determines default tax values to apply to B2B, B2C, and online customers

Supplier Class Templates

  • Determines tax schemes that will be applied to purchases and expenses.

Item Class Templates

  • Determines if tax will be taken from the Item or Customer.

  • Determines class B2B and B2C customer class templates to apply to a country.

  • Determines if class templates will be taken from the postal code.

Postal Code

  • Determines the class templates to apply to the postal code.

  • Determines class templates to apply to new postal codes within the same state, county, or province.

  • Determines various tax rates from a specific postal code (tax rates are also importable).

  • Implements a “class template rule” wherein new postal codes (created on the fly or from the registration of online customers) are applied a common class template with the appropriate tax schemes e.g. apply the statewide tax (from class templates) to all counties within the state or apply the same tax (from class templates) to all postal codes within the specified county.

Preferences

    • Customer Preferences – Enables the system to get tax information from customers. When turned off, the system will look for tax information from the inventory items, otherwise, there will be no default tax implemented.


    • Inventory Preferences – Enable tax override that will apply product-specific tax information at a given duration e.g no tax implemented if a product is included in a declared tax holiday.


    • Supplier Preferences – Enable the system to get tax information from suppliers. When turned off, the system will look for tax information from the inventory items, otherwise, there will be no default tax implemented.

 

Use Default Tax Schemes (No Tax Calculation)

TAX SCHEME SAMPLES

The following examples describe how tax may be implemented using different rules and jurisdictions. Most tax considerations and values mentioned here are fictional or loosely based on actual tax rates.

NO SALES TAX ON GOODS AND SERVICES

If you do not charge sales tax on goods or services, you can leave the default Sales Tax Scheme, Sales No Tax with a value of 0% as the default Tax assigned to default Ship To class templates. 

The following table describes how the default Sales Tax is set up in Connected Business.

Tax Considerations Tax Scheme Tax Value Ship To Class Template Field Ship To Class Templates Country Preferences
No tax on the sale of goods and services

Sales No Tax

Group 1 – Sales No Tax (0%)

Tax

Default Wholesale (US)
Default Retail (US)
Default Online Customer (US)

USA

 

Customer Preference – Get Tax Code from Customer = Yes

(same) (same) (same) Default Wholesale (Other countries) All other ountries

NO SALES TAX ON SHIPPING COSTS (FREIGHT)

If you do not charge tax on shipping costs (freight), you can leave the default, Sales Tax Scheme, Sales No Tax with a value of 0% as the default Freight Tax assigned to default Ship To class templates. 

The following table describes how the default tax on additional charges is configured in Connected Business.

Tax Considerations Tax Scheme Tax Value Ship To Class Template Field Ship To Class Templates Country Preferences
No tax on shipping costs (freight)

Sales No Tax

Group 1 – Sales No Tax (0%)

Freight Tax

Default Wholesale (US)
Default Retail (US)
Default Online Customer (US)

USA

Customer Preference – Get Tax Code from Customer = Yes

(same) (same) (same) Default Wholesale (Other countries) All other ountries

NO SALES TAX ON ADDITIONAL CHARGES

If you do not apply tax on additional charges, can leave the default, Sales Tax Scheme, Sales no Tax with a value of 0% as the default Other Tax assigned to default Ship To class templates. 

The following table describes how the default tax on additional charges is configured in Connected Business.

Tax Considerations Tax Scheme Tax Value Ship To Class Template Field Ship To Class Templates Country Preferences
No tax on additional charges 
(Included in the sale of goods and services)

Sales No Tax

Group 1 – Sales No Tax (0%)

Other Tax

Default Wholesale (US)
Default Retail (US)
Default Online Customer (US)

USA

Customer Preference – Get Tax Code from Customer = Yes

 

(same) (same) (same) Default Wholesale (Other countries) All other ountries

NO SALES TAX ON WHOLESALE / FOR RESALE ITEMS

If you sell wholesale goods or products for resale, you can assign the default tax scheme, Sales No Tax with a value of 0% as the default Tax assigned to the Wholesale Ship-To Class Template.

Tax Consideration Sales Tax
Wholesale Customers (worldwide) 0%
Retail Customers (USA) 7.5%
Retail Customers (Australia) 10%

The following table describes how sales tax is imposed on retail customers and no tax is imposed on wholesale customers.

Tax Considerations Tax Scheme Tax Value Ship To Class Template Field Ship To Class Templates Country Preferences
Wholesale Customers

Sales No Tax

Group 1 – Sales No Tax (0%)

Tax

Default Wholesale (US)

USA


Customer Preference – Get Tax Code from Customer = Yes

(same) (same) (same) Default Wholesale (Other countries) All other ountries
Retail Customers (USA) US Retail Sales Tax Group 1 – US Retail Sales Tax (7.5%) Tax Default Retail (US) USA
Retail Customers (Australia) Australia Goods and Services Tax Group 1 – Australia GST (10%) Tax Retail Customer (AU) Australia

NO SALES TAX IMPOSED ON CERTAIN DELIVERY AREAS

If you deliver to places where there is no sales tax required, you can assign the default tax scheme, Sales No Tax with a value of 0% as the default Tax assigned to the Ship-To Class Template. For example, in Alaska, where there is no statewide tax, the cities of Bethel, Clarks Point, and Dillingham counties charge their own 5% sales tax each.

Tax Considerations State Tax City Sales Tax
Bethel, ALASKA 0% 5%
Clarks Point, ALASKA 0% 5%
ALASKA, (All other cities) 0% 0%

The following table describes how sales tax is implemented in a state where no state tax is implemented but still has certain cities that collect them.

Tax Considerations Tax Scheme Tax Value Ship To Class Template Field Ship To Class Template Country Postal Codes Postal Code Tax Field

Class Template Rule

Preferences
No statewide tax and no city sales tax Sales No Tax Group 1 – Sales No Tax (0%) Tax Default Wholesale (US)
Default Retail Class (US)
Default Online Customer (US)
USA – Prioritize postal code = Yes Most cities in Alaska 0% State Code – AL
County – Any 
Class Templates - 
B2B - Default Wholesale (US)
B2C - Default Retail (US)
Customer Preference – Get Tax Code from Customer = Yes
No statewide tax but sales tax is collected in some districts (cities or provinces) Alaska - Sales Tax Group 1 – Alaska Sales Tax (5% postal rate)Tax Default Wholesale (Bethel, AL)
Default Retail (Bethel, AL)
USA - Prioritize postal code = Yes Any postal code in Bethel. City Sales Tax – 5% State Code – AL
County – Bethel
Class Templates – 
B2B – Default Wholesale (Bethel, AL)
B2C - Default Retail (Bethel, AL)
State Code – AL
County – Clarks Point
Class Templates – 
B2B – Default Wholesale (Clarks Point, AL)
B2C – Default Retail (Clarks Point, AL)
Default Wholesale (Clarks Point, AL)
Default Retail (Clarks Point, AL
Any postal code in Clarks Point.

NO PURCHASE TAX CHARGED BY WHOLESALE SUPPLIERS

If you purchase from suppliers who do not charge sales tax, you can assign the default tax scheme, Purchase No Tax with 0% value and assign them to supplier class templates.

Tax Considerations Purchase Tax
Suppliers Who Do Not Charge Tax On Purchases
Suppliers of Wholesale Goods 
Suppliers of Production Materials (Machinery)
Exempted Purchases/Expenses (e.g. Leased Property)
0%

The following table describes how Purchase Tax is not imposed on exempt purchase/expenses and how Purchase Tax is imposed on taxable expenses.

Tax Considerations Tax Scheme Tax Value Supplier Class Template Field Supplier Class Template Country Preferences
Supplier of Goods/Production Materials, Suppliers Who Do Not Charge Purchase Tax Purchase No Tax Group 1 – Purchase No Tax (0%) Tax Default Supplier (US) USA Supplier Preferences - Use Supplier Tax Code for line items = Yes
(same) (same) (same) Default Supplier (Other Countries) All other countries

NO SALES TAX EXEMPT DURING HOLIDAYS

If a product you are selling is tax-exempt during a tax holiday­, you can assign the default tax scheme, Sales No Tax with a value of 0% as the default Tax assigned to the Inventory Item. For example, a 3-day tax holiday was announced for your state for the sale of clothing, groceries, or school supplies.

Tax Considerations Date Range Exempted Price Range
Clothing Aug 1- 3 $15 or less
Groceries Aug 1- 3 No price range

The following table describes how to create an override for sales tax from customers and get the tax information from the item during the tax holiday.

Tax Considerations Tax Scheme Tax Value Apply to Items Item Detail fields Tax to Override Date Range Preferences
Items subject for tax holiday (w/o price range) Sales No Tax Group 1 – Sales No Tax (0%) All items under Groceries category Taxation tab -
Sales Tax Option = Inventory

Inventory Sales Tax = Sales No Tax

All Ship To Sales Tax

Aug 1 -3 Customer Preference – Get Tax Code from Customer = No

Inventory Preferences – Enable Tax Override = Yes
Items subject for tax holiday (with price range) Clothing Tax Holiday Group 1 – Clothing Tax Holiday (0% for $15 or less, normal tax rates for $15 above) All items under Clothing category Taxation - 
Sales Tax Option = Inventory
Inventory Sales Tax = Sales No Tax
All Ship To Sales Tax Aug 1 -3

In another example, a 12-mo tax holiday on import duties tax was announced for your state for the import of goods.

Tax Considerations Date Range Import Duties Tax Custom Service Charges VAT
Tax Holiday on Imported Building Materials Jan 2012 – Dec 2012 0% 12% 5%

The following table describes how to create an override for tax on purchases of imported building materials during the tax holiday. Below are sample values of tax rates and how “tax grouping” was used to group tax rates that would apply.

Tax Considerations Tax Scheme Tax Value Apply to Items Item Detail fields Tax to Override Date Range Preferences
Items subject for tax holiday (w/o price range) Purchase Import Tax Group 1- Purchase No Tax (0%)

Group 2- Custom Service Charge Tax (12%)

Group 3- Import Duties Tax (0%)
All items under Building Materials category Taxation tab - 
Purchase Tax Option = Inventory

Inventory Purchase Tax = Purchase Import Tax

All Purchase Taxes

Jan 2012 – Dec 2012 Supplier Preference– Get Tax Code from Supplier = No

Inventory Preferences – Enable Tax Override = Yes

 

Create New Tax Schemes (With Tax Calculation)

COMMON TAX RATES APPLY

If you apply a common tax rate to most of your goods or services or apply only one tax scheme, you may create a new sales tax scheme with an appropriate tax value (tax component) and replace the default Sales Tax value in the class templates. For example, you have a store or shop where customers walk in and pick up the goods you are selling.

Tax Considerations Tax Scheme Tax Components
Common or one sales tax applied on the sales of goods and services US Sales Tax 7.5% sales tax rate (combined) or 
6.5 % state tax and a 1% local tax rate

The following table describes how a common sales tax is implemented in Connected Business.

Tax Considerations Tax Scheme Tax Value Ship To Class Template Field Ship To Class Templates Country Preferences
Sales tax levied on the sale of goods and services

US Sales Tax

Group 1 – Sales Tax (7.5%)

Tax

Default Wholesale (US)
Default Retail (US)
Default Online Customer (US)

USA

Customer Preference – Get Tax Code from Customer = Yes

(same) Group 1 – State Sales Tax (6.5)
Group 2 – Local Sales Tax (1%)
(same) (same) All other ountries

TAX ON SHIPPING COSTS (FREIGHT)

If you charge tax on shipping costs (freight), you may create a new tax scheme with an appropriate tax value (tax component) and replace the default Freight Tax value in the class templates.

Tax Considerations Tax Scheme Tax Components
Common sales tax rate on the shipping of goods US Shipping Tax 7% tax on shipping tax within the US

The following table describes how a common sales tax is set up in Connected Business.

Tax Considerations Tax Scheme Tax Value Ship To Class Template Field Ship To Class Templates Country Preferences
Tax implemented on the shipping of goods

US Sales Tax

Group 1 – Shipping Tax (7%)

FreightTax

Default Wholesale (US)
Default Retail (US)
Default Online Customer (US)

USA

Customer Preference – Get Tax Code from Customer = Yes

 

(same) (same) (same) (same) All other ountries

In the next example, a store in Canada applies a 10% shipping tax for all orders shipped within the US and a 12% shipping tax for orders shipped outside the country.

Tax Considerations 
(Shipping Location by Country)
Shipping Tax
Within USA 10%
Outside USA 12%

The following table describes how shipping tax is implemented on all orders within the same country and all orders overseas:

Tax Considerations Tax Scheme Tax Value Ship To Class Template Field Ship To Class Templates Country Preferences
Within USA

USA Shipping Tax

Group 1 – USA Shipping Tax (10%)

FreightTax

Default Wholesale (US)
Default Retail (US)
Default Online Customer (US)

USA

Customer Preference – Get Tax Code from Customer = Yes

 

Outside USA International Shipping Tax Group 1 – Int. Shipping Tax (12%) FreightTax Default Wholesale (All other countries)
Default Retail (All Other Countries)
Default Online Customer
All other ountries

In another example, a store in the US ships products worldwide. The store collects a 15% sales tax on orders shipped to Area A and a 7% sales tax on orders shipped to Area B. Collecting sales tax for orders shipped to other regions in the world is not required. Also collected are taxes on shipping charges for or

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