Setting up US Sales Tax

1. Introduction

• Tax System

From the beginning, ERPAG was primarily intended for small and medium-sized companies worldwide. Sales Tax and Value Added Tax (VAT) systems are predominantly used (or in some countries there is a combination of both systems). USA has Sales Tax while EU has VAT. In ERPAG, the tax system is automatically filled in when opening the databases, based on the country selected.

• Tax location

The first important factor is Tax Location / Tax Point. Depending on the state (sometimes the type of goods or services), the application of the tax rate also depends on the "origin" or "destination" principle. E.g. if the export of goods then it is tax exempt.

• Tax Category

Another important factor is the tax tariff on goods and conditions. E.g. In the USA it is usually with or without tax (although there are some exemptions, in some US States groceries have a lower rate), in most EU countries there is a "standard", "reduced rate" and tax exemption, while in Canada there are GST / PST / HST that vary from province to province. In this text we will focus on US sales tax.

• Tax Jurisdiction

In almost all cases, the tax is the percentage amount that applies to the sales price excluding tax, and this is called the combined rate. Depending on the country, there may be different levels of tax revenue distribution from state to state (in USA, for example: State, City, County, Special).

• Obtaining a tax rate

The tax rate is obtained as a result (cross section) of the tax category for the item, tax location and the sum of tax jurisdictional rates. Look complicated? Through the example, it will be easier to understand.

2. US Sales Tax Rates

For our example, we take the Clark County Nevada tax location (ZIP code 89109). At the time of writing this blog, the cumulative tax rate is 8.1% (State tax 4.6% and County tax 3.5%). There are two tax categories ("default" where there is tax and "services" where there is no tax).

Example of set tax location setup:

3. Tax Category

When defining a product, we are setting up the tax category:

It’s the same with services:

4. Sales Order

When entering a sales order, we have a "tax location" field:

Based on this information, the tax rate and the tax are calculated in the document.

5. Export / Resale

There are cases when tax is not levied even though the item is subject to tax calculation, e.g. export or resale.

In these cases, we have to open a new tax location for the "Default" tax category, where the tax rates will be "0".

The tax location can also be defined on the customer level, so when creating a sales order, ERPAG will suggest this value. In our example, we will set "tax location" to "Export" for the "EU Customer".

So, when creating a Sales Order, the tax rate for the "Item 01" will be "0".

6. Another Tax Location

In an age when the online sales are constantly increasing, there is a growing need for more tax locations (e.g. Sales Tax Nexus, https://blog.taxjar.com/sales-tax-nexus-definition). In our example, we will open a new tax location.

In ERPAG there is a possibility of filling in the tac location based on the ZIP CODE, but you have to check such obtained data since we do not update this database often.

We recommend TaxJar (https://www.taxjar.com) or Avalara (https://salestax.avalara.com) for verification.

In our example, the tax rate is 9% = 6.5% (State tax) + 1% (County tax) + 1.5% (Special tax). Now, when creating a Sales Order, we can overwrite the proposed Tax Location (e.g., delivery is in California)

Consequently, in this example, tax will also be charged on Shipping.

7. Tax by origin / destination

Previous examples were tax calculation by destination. i.e. the tax location is the location where the items are delivered for the customer.

By origin tax calculation means that the sales location is the tax location.

When setting up a warehouse, we need to specify the tax location.

If we have more than one warehouse, it is necessary to designate a tax location for each warehouse.

In this case, when setting up the customer, we are choosing the "The same as the warehouse" option in the tax location field.

Now, when creating a Sales Order, the system will offer the tax location of the appropriate warehouse.

8. Purchase order

Most ERPAG customers procure goods as resellers, where, in most cases, sales tax exemptions occurs, so suppliers do not charge sales tax.

So, the "input tax" section remains blank.

If the supplier does calculate the sales tax, we need to type in the sum of tax into the ‘’input tax’’ section.

In our example, the obligation to the supplier will be $ 298.65 = $ 250 (Item 01) + $ 35 (Item 02) + $ 10 (Landing cost) + $ 3.65 (Input tax). In the sales tax system, there is no tax deduction option, but there are two ways to allocating values,

• Tax expenses

I.e. as a direct expense (the entire amount of tax is posted to accounting as an expense in the relevant account)

• Inventory

It becomes part of the landing cost in the document and will only be credited to Cost of goods sold (COGS) at the time of sale.

9. Changing Tax Rates

Over time, local tax authorities change their tax rates.

This change is made in ERPAG simply by changing the rate. ERPAG will automatically declare the old tax rate as inactive. Please note that there is no information to indicate from when to when a certain tax rate is valid, the change will be effective from the moment you update the tax rate, so all the documents that were created prior to the change will have the old tax rate, while the newly created ones will have the new tax rate.

Whether an entered but not yet completed sales order should have the old or the new tax rate, it's up to you. If you want to use the new tax rate, those sales orders must be modified or voided.

In our example, the County tax changed from 3.5% to 3.65%.

There is another solution i.e. to assign a new tax category with new tax rates.

In order to add the new tax category to the items, we recommend that you use the filter and bulk action.

After that, you can set the old tax category as inactive.

10. Review of the calculated tax

Note:

ERPAG is primarily intended for internal business management, for the calculation of taxes and other liabilities, please consult your accountant or tax advisor.

Tax related reports are for informational purposes only, and serve to ensure that management has some information about tax liabilities.

We do not recommend or have any obligation, warranty or liability for filing tax returns based on reports from ERPAG.

For each Tax location, under each Tax jurisdiction there is a possibility to enter a "Tax code".

"Tax code" is a reference that will be posted to the account section of ERPAG when creating invoice. This is an example of a Journal voucher from the Sales Order SO-000001.

The tax liability reference for the Sales tax is the "Tax Code" from tax.

In the accounting section of the main menu you have the "tax preparation" report.

The due date for taxes is taken from the localization setting.

11. Web Shops

When downloading a Sales Order, tax rates are always transferred from the Web Shop.

Tax location will be called "Web shop" and there will be no possibility of change.

12. TaxJar Integration

One of the benefits of ERPAG are its integrations. In order to make it easier for our users to determine their tax rates, we have integrated the TaxJar API (https://developers.taxjar.com/demo) into ERPAG.

The API token is entered into the localization parameters.

After that, a Product tax code must be assigned to each Tax Category.

On the Sales Order level, we will set the Tax Location to be "TaxJar".

When saving the document, ERPAG will send TaxJar the location of the warehouse from which the goods are issued, the location where the goods are delivered, the product tax code for each item. The TaxJar API's answer are the appropriate tax rates.

Note: At the moment of writing this text, TaxJar integration is in its ‘’beta’’ version.