How to Set Up Sales Tax Classes, Tax Codes, and Tax Schedules

The first step in defining sales tax information is to define different types of tax classifications in Sales Tax Class Maintenance. The following three tax classes are defined automatically by the system and cannot be deleted: Nontaxable (NT), Taxable (TX), and Taxable Freight (TF). A tax class must be defined for each classification of goods and services that are taxed at different rates.
Note The TF (Taxable Freight) tax class is used to calculate sales tax on freight amounts.

Define Sales Tax Classes

1. Open Library Master, Setup, Sales Tax Class Maintenance.
2. In the Sales Tax Class Maintenance window, enter a class at the Tax Class field. At the Description field, type a description for the tax class and click Accept. Repeat steps 2 and 3 for each tax class you need to define.
3. After defining sales tax classes, assign the tax classes to item codes, inventory items, and miscellaneous charges.

Define Sales Tax Codes

1. Open Library Master, Setup, Sales Tax Code Maintenance.
2. In the Sales Tax Code Maintenance window, enter a code at the Tax Code field and type a description at the Description field.
3. If the tax code you are defining has a limit, enter the Taxable Limit field. For example, some tax jurisdictions have a limit for the amount of sales tax that can be defined on an invoice, sales order, or receipt.
4. At the Short Desc field, type a short description. This description will be used when printing tax detail on forms.
5. Complete one of the following options:
   • Select the Calculate Sales Tax on Retention check box to calculate sales tax on the invoice amount less retention.
   • Clear the Calculate Sales Tax on Retention check box to calculate the sales tax on the full invoice amount, regardless of retention.
6. Complete one of the following options:
   • Select the Expense to Vendor/Item check box to allocate the Nonrecoverable portion of purchase sales tax to the vendor's Expense account in Accounts Payable or to the Inventory account in Purchase Order.
   • Clear the Expense to Vendor/Item check box if the Nonrecoverable portion is not to be allocated.
7. Complete one of the following options:
   • Select the Tax on Tax check box if this tax code is subject to taxation by other tax jurisdictions, and proceed to step 8.
   • Clear the Tax on Tax check box if the tax code is not subject to tax on tax, and proceed to step 9.
8. If you selected the Tax on Tax check box, enter a class to be used for Tax on Tax calculations at the Tax Class field
   Note The Tax Class field next to the Tax on Tax check box is the only place you can enter a "tax on tax" tax class; you cannot enter this in Sales Tax Class Maintenance.
9. For each tax class defined (except for tax class NT which cannot be maintained or deleted), complete the following fields:
   • Select the Sales check box to calculate sales tax for this code, or clear the Sales check box if sales tax should not be calculated.
   • At the Tax Rate field, type the tax rate percentage to use for calculating taxes.
   • Note If your tax jurisdiction charges tax on freight, you must set up a tax rate for the TF tax class in each applicable tax code.
   • Select the Purchases check box if purchases are taxable for the tax class entered and proceed to step d. Clear the Purchases check box if the purchases are not taxable and proceed to step e.
   • If the Purchases check box is selected, type the percentage of the purchase tax that cannot be recovered at the Nonrecoverable % field. Enter 0 (zero) at this field if all purchases sales tax is to be posted to the Accounts Payable Sales Tax account. Enter 100 at this field to post all of the purchases sales tax to the Nonrecoverable account.
   • Click OK.
   • Click Accept.

Define Sales Tax Schedules

1. Library Master, Setup, Sales Tax Schedule Maintenance.
2. In the Sales Tax Schedule Maintenance window, enter a schedule at the Tax Schedule field and type a description at the Description field. For more information, see Sales Tax Schedule Maintenance - Fields.
3. At the Tax Code field, enter a tax code to add to this tax schedule and click OK. Repeat this step for each tax code you want to add to the tax schedule.
   The sequence in which the tax codes are entered is very important because of "tax on tax" calculations and the establishment of the primary tax code. If a tax code is taxable by another tax code, it must be calculated first. For example, if tax code CA is taxable by tax code OR, CA would have to be calculated first to get an accurate calculation for the OR tax code. The first tax code entered will become the primary tax code. The primary tax code is used during the calculation of taxable and nontaxable amounts on each invoice and printing/updating of sales tax history.
4. Click Accept.