Sales tax setup and settlement

Sales tax rules appear in many exam scenarios. Almost all problems come from one missing link between a code, a group and an authority.

The building blocks

Item	Purpose
Sales tax authority	A vendor to whom tax is paid or from whom it is reclaimed
Settlement period	How often tax is settled, such as monthly
Ledger posting group	Main accounts for sales tax payable and receivable
Sales tax code	The rate, calculation base and limits
Sales tax group	Set of codes assigned to a customer, vendor or address
Item sales tax group	Set of codes assigned to an item or ledger account

How tax is calculated

Finance calculates a tax only when a code is in both the sales tax group and the item sales tax group. If one side is missing, no tax appears.

The sales tax group defaults from the customer or vendor, and can be overridden by the delivery address when that is enabled. The item sales tax group defaults from the item (or from the procurement category or main account for non-stock lines).

For automatic calculation on a sales order you therefore need:

1. Sales tax codes with values and a posting group.
2. An item sales tax group containing the codes, set as the default on the item.
3. A sales tax group containing the same codes, set on the customer.

Settlement

Run Settle and post sales tax per settlement period. The process moves the balance of tax payable and receivable to the sales tax authority and creates an amount you pay through accounts payable. Settlement periods are set per authority, and a code settles using the period of its authority.

Special options

• Use tax is self-assessed tax on purchases where the vendor did not charge it.
• Exempt and Tax on tax control how a code is calculated.
• A Conditional sales tax applies only if a condition is true, such as a threshold.
• Codes can be limited by tax limits and marginal base.

Exam traps

• A code on only one group yields no tax.
• Settlement belongs to the authority, not the customer or code group.
• Use tax payable is not the same as normal sales tax payable.
• A posting group sets accounts, a tax group sets codes. Do not mix them up.
• Sales tax group on the customer and item sales tax group on the item are two separate setups.

Practice questions

Choose an answer, then review the explanation to check your understanding.

1. Sales tax must be calculated automatically on sales orders. Which pair of groups must share at least one sales tax code?

1. A.Customer group and item group
2. B.Sales tax group and item sales tax group
3. C.Posting profile and tax authority
4. D.Settlement period and sales tax authority

Show answer

Answer: B.Tax is calculated only for the codes that appear in both the sales tax group (from the customer or vendor) and the item sales tax group (from the item).

2. Sales tax payable must be posted to the same main accounts in all legal entities. What do you configure?

1. A.Tax group
2. B.Sales tax jurisdiction
3. C.Ledger posting group on the sales tax codes
4. D.Use tax payable

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Answer: C.The ledger posting group on the sales tax code defines the accounts for payable and receivable tax. Entities that share the chart use the same main accounts.

3. A company must remit sales tax to two authorities on different schedules. What do you set up?

1. A.One settlement period for both
2. B.One tax authority and one tax group
3. C.A sales tax authority and a settlement period for each
4. D.Two item sales tax groups

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Answer: C.Each sales tax authority is a vendor with its own settlement period.

4. What does running Settle and post sales tax do?

1. A.Posts invoices to customers
2. B.Moves the collected and paid tax balances to the settlement account and creates a payable to the authority
3. C.Reverses sales tax from posted orders
4. D.Calculates tax on open orders

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Answer: B.Settlement closes the tax balances for the period and creates the amount owed to the tax authority.