Tax Systems Overview

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).

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, these check boxes 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 these fields on the Tax Systems form:

• 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 UK, 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.

Forms and Fields Used in Setting Up Tax Systems

The next sections describe the forms and fields used in setting up tax systems.

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 Sales / Parts Orders, 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/UK 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.)

Select Transfer VAT if you want to enable VAT recognition upon bank reconciliation of voucher and invoice payments.

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 US 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 entered in the Customers form and Vendors form to use as default values when entering invoices. You can create one set of tax codes per tax system.

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.