Setting Up Tax Systems
- For businesses operating in Canada, the system assumes that the main tax system (GST) is set up as Tax System 1, with either an item-based or an area-based tax mode, depending on provincial requirements. The system also assumes that PST and HST are set up as Tax System 2, with an area-based tax mode.
- For European Union (EU) countries and Australia, the system assumes that the main tax system (sales tax or VAT tax) is set up as Tax System 1, with an item-based tax mode.
For other countries that use VAT (which is an item-based tax), Tax System 1 can be area-based and Tax System 2 can be item-based, or the reverse.
- For the United States, the system assumes that the main tax system (sales tax) is set up as Tax System 1, with an area-based tax mode.
Area-Based Tax System
The area-based tax system, which applies to U.S. companies, allows taxes to be charged at the header level. On the Tax Codes form, you assign tax rates to a state tax code. The Include Price and Include Misc options on this form should be selected, and the A/R account number must be defined.
Under the area-based tax system, if an item is tax-exempt (as specified in the Items form), the system ignores the tax code at the order header level and does not charge sales tax.
If an item is taxable, the system charges tax based on the "Ship To" customer's tax code (or the "Bill To" if it is the same as the "Ship To" customer).
Tax discounts and allowances can be adjusted in area-based tax systems.
If a line item is drop shipped, tax is charged based on the tax code of the "Drop Ship" customer. This overrides the tax status of the line item and the header tax code. If you want to display a message asking if sales tax should be charged based on the tax code of the "Drop Ship" customer, the following options must be selected for the tax system:
- Prompt on Line Item (on the Tax Systems form) - Asks whether an item is taxable or nontaxable at the line item level of an order.
-
Prompt for [Tax System
(1)] (on the
Tax Parameters form) - Asks whether an item is
taxable or nontaxable in the
Items form's
Sales tab. If there are two
tax systems, the form has two
Prompt for... fields, one
for each tax system.
The [Tax System (1)] portion of the field is replaced by the tax system's name.
If you are using only an area-based tax system, do not set a default value for the following fields on the Tax Systems form; otherwise you may encounter problems:
- Item Tax Code
- AR/AP Tax Code
- Freight Tax Code
- Misc Tax Code
These four fields are only used for item-based tax systems. You can choose to Include Misc Charges and Include Freight when setting up the tax code on the Tax Codes form.
Item-Based Tax System
The item-based tax system mainly applies to Canada, the United Kingdom, and European Union (EU) countries. It allows sales taxes to be charged at the line item level and tax codes to be specified in the Items form. (For example, this type of tax is used for Canada's GST.) The system looks at the tax rate of the item and overrides the tax code on the order header.
Parametric Sales Tax System
The parametric sales tax system allows flexibility mainly for the EU. Many of the fields and options should be ignored (or set to N) for U.S. companies.
General Parameters Form
Use this form to set parameters used throughout the system. The following fields on the General Parameters form apply to tax systems:
| Field | Description |
|---|---|
| Activate EU Reporting | Selected to activate EU VAT information |
| EU Wt. Conv. Factor | Converts the Weight field in the Item file to kilograms (unit weight on EU SSD) |
| Capitalize State Abbreviations | Selected for uppercase |
Tax Systems Form
Use this form to establish the tax system and tax codes used in processing Value Added Tax (VAT) or sales tax related information. The VAT function processes items in Customer Order Entry, Purchasing, Accounts Receivable, and Accounts Payable.
Set the Tax Mode to Area for U.S. companies. This allows tax rates to be entered at the header level.
Set the Tax Mode to Item for European/U.K. companies. This only allows tax rates to be entered at the item level. (Taxes are based on each item of the sale - for example, VAT.)
For example, if the Active For Purchasing field is set to Yes after POs have already been entered into the system, the current POs will NOT contain the proper tax codes, and the tax records on the PO side will be nonexistent.
Use the Tax Codes tab on this form to define default tax code information.
- If there are commissions, non-A/P, or non-A/R charges, associate their tax codes with Tax System 1.
- The Transfer A/P VAT Tax Code and the Transfer A/R VAT Tax Code are used when Transfer VAT is selected on the Tax Codes form.
Use the Labels tab to customize labels for tax codes, tax amounts, and tax IDs.
Tax Parameters Form
Use this form to set your company's specific reporting and functionality requirements.
Tax Jurisdiction Form
Use this form to record where taxes are located. It allows you to group tax codes into jurisdictions. Each tax code can be assigned a jurisdiction.
The Tax Jurisdiction form is not applicable for U.S. companies.
Tax Codes Form
Use this form to set up tax codes that specify the percentage of tax to charge to a customer, and the G/L Account to which the sales tax is to be posted. These tax codes are used when entering invoices and vouchers. You can create one set of tax codes per tax system. See the two Entering Tax Code Information topics in Related Topics, below.
Select Transfer VAT if you want to enable VAT recognition upon bank reconciliation of voucher and invoice payments.
Address Tax Code Defaults Form
Use this form to set up default tax codes by location for new customer and vendor records.
Chart of Accounts Form
Use this form to set up tax accounts. For example, if your system handles VAT taxes, input and output VAT accounts are required.