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Tax Codes - Frequently Asked Questions

This article applies to:Avalara AvaTax

Here are the answers to some of our frequently asked questions about tax codes:

What is a tax code?

A tax code is a unique label used to group items (products, services, or charges) together. Tax codes typically identify categories of like products, services, or charges, and are used in tax rulesHoverTT.png to create custom taxing scenarios. AvaTax provides two categories of tax codes: AvaTax system tax codesHoverTT.png and custom tax codes.

Alternatively, you can tax an item based on its UPC.

Example:

For instance, tax code PC040100 is used for general clothing products (t-shirts, slacks, etc.). When that tax code is mapped to a product, built-in tax rules correctly return zero tax when the product is invoiced to a location in Pennsylvania or Minnesota. The same tax rules fully tax the product when invoiced to a location in Alabama or Texas, and tax the product only above a specified threshold when invoiced to a location in New York ($110 threshold for the state, New York City, and some counties) or Massachusetts ($175 threshold).

What are AvaTax System tax codes?

AvaTax System tax codes are a set of predefined tax codes representing hundreds of different products, services, or charges. These tax codes are divided into five types:

  • Digital
  • Freight
  • Other
  • Product
  • Service

These five types are further divided into groups of like kinds of products, services, or charges.

Avalara provides AvaTax System tax codes to AvaTax Pro subscribers, eliminating the need to research and develop custom tax codes. Thousands of tax rules based on the AvaTax System tax codes power the tax engine to correctly process transactions for each jurisdiction in the United States.

AvaTax System tax codes are associated with tax rules for each U.S. state and the District of Columbia as well as Canada. Tax rules for home rule local jurisdictions (county, city, or special tax) that differ from their state’s taxability may not all be maintained. Contact Avalara Support for specific concerns on taxability in home rule cities.

While there is a wide variety of AvaTax System tax codes available, the AvaTax System tax codes are by no means meant to be a comprehensive catalog covering all industries. Many tax codes are designed for use by different types of businesses. The taxability associated with some tax codes may occasionally vary in some states for your business, depending on the nature of your operations.

Where there are gray areas in the taxability for a particular tax code,AvaTax takes the more conservative approach (taxable). For instance, tax code FR020100 is a freight tax code for shipping only (passing on the cost of the shipping) via common carrier (UPS, FedEx, etc.). In Florida, tax on shipping is exempt if the freight charge can be avoided by a decision or action solely on the part of the purchaser. In other words, the tax can be avoided if the seller gives the purchaser the option of picking up the product. This may well apply to your business, but because some businesses require their products be shipped, AvaTax returns freight as taxable when using this tax code. If you need freight exempted in Florida, you can create a custom tax rule to override the built-in taxability of AvaTax.

For more information, download the AvaTax System tax codes from the toolkit.

Why should I map my products and services to tax codes?

Unless you specify otherwise, AvaTax calculates all transactions at the maximum sales tax rate for a jurisdiction. This way, you know you're always fully compliant with sales tax laws. However, some products and services may have varying taxability in some jurisdictions, which means there are times when you can charge your customers a lower sales tax rate, or maybe even nothing at all if there's a sales tax holiday.

By making use of AvaTax System Tax Codes, you inform {{AAT} when you're selling a product or service with varying taxability, and {{AAT}} knows to make a different calculation than it otherwise would.

All customers have access to these codes, and they're easy to use, so don't be afraid! If you've got products and services with varying taxability, learn how to select tax codes.

What are custom tax codes?

Any tax code added or imported is a custom tax code. There are five types of custom tax codes:

  • Digital
  • Freight
  • Other
  • Product
  • Service

Custom tax codes group like kinds of products, services, or charges together. If you can't find the appropriate AvaTax System Tax code, add custom tax codes for use in tax rules.

What are the tax code types?

AvaTax System tax codesHoverTT.png and custom tax codes representing like kinds of products, services, or charges are grouped into five tax code types:

  • Digital Goods

  • Freight

  • Other

  • Tangible Personal Property (TPP)

  • Services

What is tax code FR020100?

The AvaTax System tax codeHoverTT.png FR020100 represents a common method of shipping a product. It is Freight-On-Board (FOB) destination. For this product code, the seller is responsible for delivering the product to the buyer and the sale occurs at the time of the delivery. 

To use this tax codeHoverTT.png , map an item representing a freight charge to FR020100. When AvaTax processes a transactionHoverTT.png that includes FR020100, the freight charge is taxed appropriately for each jurisdiction in the United States. 

For a full description of tax code FR020100, download the AvaTax System Tax Codes in the AvaTax System Tax Codes Toolkit.

For more information on mapping items, see how to map items to tax codes.

What is tax code P0000000?

P0000000 is the default AvaTax System tax codeHoverTT.png for Tangible Personal Property (TPP).  The default system logic for this tax codeHoverTT.png assumes an item is taxable in all jurisdictions.

Items imported to the Admin Console must have a tax code assigned to it, otherwise,  if an item's tax code field is left blank during import, AvaTax assigns tax code P0000000. Items with a tax code of P0000000 should be properly mapped to a custom tax code or an AvaTax System tax code.

Additionally, if an item is not mapped to a tax code on the Admin Console or within the accounting system with which AvaTax is integrated, AvaTax assigns tax code P0000000 and that item will calculate as taxable.

What is tax code U0000000?

U0000000 is the unknown AvaTax System tax codeHoverTT.png and assumes an item is taxable in all jurisdictions.

Every item added must have a tax codeHoverTT.png assigned to it. If an item's tax code field is left blank, AvaTax assigns tax code U0000000. Items with a tax code of U0000000 should be properly mapped to a custom tax code or an AvaTax System tax code.

What is a tax profile?

A tax profileHoverTT.png allows AvaTax to correctly process transactions for the products and services your company sells.

A tax profile defines the taxing profile of a company and is the collection of:

  • Jurisdictions
  • Tax codesHoverTT.png
  • Tax rulesHoverTT.png
  • Items

Tax profiles can be created for each companyHoverTT.png or can be inherited by a child companyHoverTT.png from its parent companyHoverTT.png. A tax profile allows AvaTax to correctly process transactionsHoverTT.png for the products and services your company sells. Special taxing scenarios can be implemented using a tax profile, including:

  • Exempting a product, service, or charge from tax
  • Taxing based on who a customer is or how they use a product or service
  • Taxing a portion of the full sales price
  • Overriding the tax rate of a jurisdiction for a product, service, or charge