Additional charges can be classified as header charge and item charge, and can be positive or negative. When the system is integrated with AvaTax, the system communicates with AvaTax to calculate tax. During this time, additional charges are treated like any other line item on the order or invoice. However, the positive and negative charges are dealt with in different ways, as explained in the following scenarios:
You must assign tax codes to positive charges such as shipping or handling charges in Order Entry Additional Charge Maintenance. Ensure that you select the code that represents how you ship your goods from the list of AvaTax freight tax codes.
For example, if you want to ship using a common carrier free on board (FOB) destination, then select the AvaTax freight tax code FR020100 that is defined as Shipping via common carrier FOB destination and assign it as the tax code in Order Entry Additional Charge Maintenance.
In some jurisdictions, the taxability of the shipping or handling charges follow the taxability of the items on the order or invoice. So, if the items being shipped are tax exempt, then the freight is also tax exempt.
The following table shows an example of shipping items with different taxability.
|
Item/Charge |
Item/Charge Code |
Description |
Tax Code |
Amount |
|
Item |
A |
Taxable Item |
P0000000 |
100 |
|
Item |
B |
Non-Taxable Item |
NT |
200 |
|
Charge |
Freight |
Shipping |
FR020100 |
300 |
The system sends the following API request (sample) to AvaTax:
{
"type": "SalesInvoice",
"code": "Test022401",
"date": "2020-02-24",
"customerCode": "TESTCUSTOMER",
"addresses": {
"shipFrom": {
"line1": "100 Ravine Lane NE",
"city": "Bainbridge Island",
"region": "WA",
"country": "US",
"postalCode": "98110"
},
"shipTo": {
"line1": "3500 Pan American Dr.",
"city": "Miami",
"region": "FL",
"country": "US",
"postalCode": "33133"
}
},
"lines": [
{
"number": "1",
"quantity": 10,
"amount": 100,
"taxCode": "P0000000",
"itemCode": "A",
"description": "Taxable Item"
},
{
"number": "2",
"quantity": 10,
"amount": 200,
"taxCode": "NT",
"itemCode": "B",
"description": "Non-Taxable Item"
},
{
"number": "3",
"amount": 300,
"taxCode": "FR020100",
"itemCode": "Shipping"
}
]
}
And the calculated tax is as follows:
The total taxable amount is $200, total tax amount is $14.
The freight charge will have only $100 of the $300 being considered taxable because item B is not taxable.
$100 = $300 (Freight Amount)*100 (Item A's Amount) / 300 (Total Item Amount)
Assuming the tax rate for Item A and Freight is 7%, the total tax amount is $14 = $7+7.
Tax on Item A = $100 * 7%
Tax on Freight = $100 * 7% (only 1/3 of the freight is taxable)
NOTE In the above example, it does not matter if the freight is added on the invoice header or a specific line item. The results are the same. In summary, header or line item charge taxability is determined by evaluating all the lines on an order or an invoice.
Negative charges such as discounts follow the taxability of the items (being discounted) themselves. So, when assigning tax codes, ensure that you use the same AvaTax tax codes on the discount lines as that of the item being discounted. This ensures that the taxability rules applicable to the product or service is applied to the discount too.
NOTE If you have selected the Tax with Item option in Order Entry Additional Charge Maintenance, and the discount is added to the line level, the system automatically uses the same tax code as the associated line item when sending the API request. However, if the discount is added to the order or invoice header, the system does not send any tax code and the default tax code is used.
The following table shows an example of sending lines that contain the discounted amount as a negative extended amount.
|
Item/Charge |
Item/Charge Code |
Description |
Tax Code |
Amount |
|
Item |
A |
Taxable Item |
P0000000 |
100 |
|
Item |
B |
Non-Taxable Item |
NT |
200 |
|
Item Charge |
Discount |
Discount applying to A |
P0000000 |
-10 |
|
Item Charge |
Discount |
Discount applying to B |
NT |
-20 |
The system sends the following API request (sample) to AvaTax:
{
"type": "SalesInvoice",
"code": "Test022402",
"date": "2020-02-24",
"customerCode": "TESTCUSTOMER",
"addresses": {
"shipFrom": {
"line1": "100 Ravine Lane NE",
"city": "Bainbridge Island",
"region": "WA",
"country": "US",
"postalCode": "98110"
},
"shipTo": {
"line1": "3500 Pan American Dr.",
"city": "Miami",
"region": "FL",
"country": "US",
"postalCode": "33133"
}
},
"lines": [
{
"number": "1",
"quantity": 10,
"amount": 100,
"taxCode": "P0000000",
"itemCode": "A",
"description": "Taxable Item"
},
{
"number": "2",
"quantity": 10,
"amount": 200,
"taxCode": "NT",
"itemCode": "B",
"description": "Non-Taxable Item"
},
{
"number": "3",
"amount": -10,
"taxCode": "P0000000",
"itemCode": "Discount",
},
{
"number": "4",
"amount": -20,
"taxCode": "NT",
"itemCode": "Discount",
}
]
}
And the calculated tax is as follows:
The total taxable amount is $90 (= $100-10), total tax amount is $6.3 (tax rate = 7%).
So, if the tax code for the discount line matches the line being discounted, this results in correct tax calculation.
When an invoice is consolidated or not, the resultant tax amount can differ based on the shipping or handling charges involved.
The following is an example of two orders, each has one item and the second order has a freight charge added.
|
Order # |
Item/Charge |
Item/Charge Code |
Description |
Tax Code |
Amount |
|
1 |
Item |
A |
Taxable Item |
P0000000 |
100 |
|
2 |
Item |
B |
Non-Taxable Item |
NT |
200 |
|
2 |
Charge |
Freight |
Shipping |
FR020100 |
300 |
The assumption is that the tax rate for P0000000 and FR020100 is 7%. Now, consider the following scenarios:
Scenario 1 - No consolidation
The orders are not consolidated for invoicing. Each order has its own invoice created.
|
Reference # |
Item/Charge |
Item/Charge Code |
Tax Code |
Amount |
Tax Amount |
Note |
|
1 |
Item |
A |
P0000000 |
100 |
7 |
- |
|
2 |
Item |
B |
NT |
200 |
0 |
- |
|
2 |
Charge |
Freight |
FR020100 |
300 |
0 |
Tax is 0 because B is not taxable |
|
|
|
|
|
600 |
7 |
Total Amount = 607 =100+200+300+7 |
Scenario 2 - Consolidation
The orders are consolidated for invoicing and only one invoice is created.
|
Reference # |
Item/Charge |
Item/Charge Code |
Tax Code |
Amount |
Tax Amount |
Note |
|
1 |
Item |
A |
P0000000 |
100 |
7 |
- |
|
1 |
Item |
B |
NT |
200 |
0 |
- |
|
1 |
Charge |
Freight |
FR020100 |
300 |
7 |
Taxable amount is $100; $100*7%=$7 |
|
|
|
|
|
600 |
14 |
Total Amount = 614 =100+200+300+14 |
This example illustrates that there is a difference in the tax amount calculation. When invoice consolidation is used, an additional $7 tax amount appears. This is because the taxability of the header or the line item charge is determined by evaluating all the lines on an order or an invoice. If the invoice has other taxable items, the tax for freight can also be more than $7.