How Sales Tax is Calculated

  • The organization defines the applicable tax jurisdictions for which it needs to collect sales tax.
  • The organization defines the applicable sales tax rates for the jurisdictions on whose behalf it collects sales tax.
  • The organization configures the taxable characteristics of the products it sells.
    • Select the Taxable option for taxable products.
    • Configure a sales tax rate's Filter Rules as necessary if a product is taxable only under a specific set of circumstances.
    • If a tax jurisdiction requires that displayed prices include tax, configure a product's price with the Price Includes Tax option enabled.
    • See Configuring Sales Tax Options for Product Pricing for details.
  • When a user creates a new order that includes an order line for a taxable product, the Order Entry system performs the following steps:
    • Determines the order line's tax jurisdiction, if one applies. Each order line can have its own jurisdiction, depending on its Ship To address.
      • In general, the order line's Ship To address is the same as the order's Ship To address, but a user can specify a different Ship To address at the order line level, if necessary. Therefore, while an order typically has one tax jurisdiction, it could actually involve multiple jurisdictions if each order line is shipped to a different Ship To address.
      • The system matches the order line's Ship To address (or, the order's Ship To address, if one is not specified at the order line) the order's Bill To address, and /or the address for the order's organization to a corresponding Tax Jurisdictions record that has the narrowest scope.
      • For example, if there is a country-scoped jurisdiction for the United States, a state-scoped jurisdiction for California, and a County-scoped jurisdiction for Santa Clara county, the system matches an order with a Ship To address in Santa Clara, CA to the Santa Clara county tax jurisdiction.
    • Determines the applicable sales tax rates that may apply to the order line based on the jurisdiction (and a parent jurisdiction, if applicable).
    • Determines whether the Bill To party (the Bill To Company, if one is specified, otherwise, the Bill To Person) is tax-exempt for a particular sales tax rate. If tax-exempt, the system does not calculate sales tax for the order line.
    • Determines which of the jurisdiction's sales tax rate applies to a particular order line and calculates the tax.
    • If applicable, determines which of the jurisdiction's sales tax rate applies to a particular order shipment and calculate the tax.
    • Aggregates the tax from the individual order lines and shipments in the order's Tax field.
    • See Sales Tax Implementation Examples for illustrations of how this process works.
  • When a user ships the order, the system automatically generates the appropriate general ledger (GL) entries for the taxable amounts based on the GL accounts specified in the corresponding Sales Tax Rates records.
  • The accounting department batches the GL entries associated with Orders and Payments, which aggregates the individual GL entries related to the tax collection for importing into your organization's accounting package.
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