To take advantage of the thousands of tax rules in the AvaTax Update engine, after you tell us where you collect and remit tax, map your items to. Assign an Avalara tax code to an item so AvaTax Update knows what sales tax to charge in varying jurisdictions.
Find the codes using the Tax Code Search Tool.
Once you identify the appropriate tax code, map it to your product in one of three ways:
- Enter it in the appropriate field in your accounting software
- Map it manually to your item in AvaTax Update
- Import items and tax codes all at once to AvaTax Update using an .xls or .csv file
Map your items to tax codes in either your accounting software or AvaTax Update, not both. Ideally, map your items to tax codes is the location where you maintain your master inventory list. If you map in both locations, the mapping in AvaTax Update overrides the mapping in your accounting software. If you're not sure where to map the items, use this flowchart to help you decide.
If you sell an item that doesn't match an Avalara tax code, create a custom tax code that defines the taxability of a product in the jurisdictions where it's sold.
How Avalara tax codes work
Eachhas associated with it that define the taxability for that code in states and local jurisdictions. Think of these tax rules as a huge matrix, where each row represents an Avalara tax code, and each column represents a jurisdiction (state, county, or city). The intersection of a row and a column contains a tax rule, such as whether or not the product or service is taxable, or exempt, or has a reduced rate, and so forth.
Depending on your accounting software, a tax code either gets passed from your accounting software or is mapped in AvaTax Update. In either scenario, the tax code is associated with an item. Most accounting software doesn't allow mapping to a product category or to a general ledger account. You must map the tax code one-on-one to an item or SKU.
If your accounting software sends a tax code, AvaTax Update sees it as one of the fields on the line item of a document. AvaTax Update then looks at the address used to tax this item, associates the address with a specific tax jurisdiction, and applies the built-in tax rule for that tax code in that jurisdiction. If the tax rule is taxable, AvaTax Update uses the built-in rate for that jurisdiction and calculate the tax. This built-in rate isn't part of the tax rule, but is a separately stored tax rate specific to that jurisdiction. If the tax rule is exempt, AvaTax Update returns a tax amount of zero. If it's a special tax rule (for example, reduced rate), AvaTax Update calculates the tax based on the tax rule’s specifications.
If a tax code is mapped in AvaTax Update, AvaTax Update looks at the item code that's sent from your accounting software, finds the tax code to which that item is mapped, and then applies the built-in tax rule as described above.
Avalara tax codes vs. custom tax codes
Tax codes are classified as either Avalara or custom tax codes. In addition to the Avalara tax codes provided by AvaTax Update, you can set up your own tax codes with their own tax rules.
For instance, if you sell a specialized device that doesn't match an Avalara tax code, you can create a custom tax code and create custom tax rules that specify the taxability of the product in the jurisdictions where it's sold.
Don't enter an Avalara tax code in the Custom Tax Codes section of AvaTax Update. Because Avalara tax codes are built into AvaTax Update, as are tax rules for each state, adding an Avalara tax code in AvaTax Update as if it were a custom code will confuse AvaTax Update and disable the built-in tax rules.
AvaTax Update tax rules vs. custom tax rules
As with tax codes, tax rules can be either AvaTax Update tax rules or custom tax codes. Avalara tax rules are those that work behind the scenes for each Avalara tax code. Create custom tax rules not only for custom tax codes, but also to override the built-in taxability of Avalara tax codes. For instance, the tax rules for shipping in Florida can fall into a gray area; some businesses might qualify as exempt, but AvaTax Update defaults to taxable for freight code FR020100. If your business qualifies as exempt, create a custom tax rule that makes FR020100 nontaxable in Florida.
Decode the tax codes
All Avalara tax codes (with two exceptions noted below) consist of eight characters.
- The first character is a letter that indicates the tax code type. For instance, P is for Products.
- The second character is a letter that's normally the first letter of the tax code category. For instance, C is for clothing.
- The final six characters are numbers that indicate a category. The categories are sorted alphabetically, with lower numbers representing category names that come earlier in the alphabet.
Thus, clothing category PC040101 represents aprons, PC040105 represents bandanas, and PC040111 represents coats and jackets.
Header codes are generic tax codes ending in a series of zeroes. Whenever possible, choose a tax code that is not a header code. Header codes have taxability tax rules associated with them, but because they're meant to be used generically, they normally default to using the most taxable tax code in the category under the header.
For example, tax code DC010000 is for Computer Software – Business-to-Business, but doesn't describe the type of software (custom vs. pre-written) or its method of delivery. That's what the six tax codes beneath the DC010000 header code are for. DC010100 is for custom software delivered on a CD, DC010200 is for custom software delivered electronically, and so forth. If you use DC010000 rather than one of the tax codes beneath it, AvaTax Update taxes the product, service, or charge you apply it to as if you've applied DC010400 (pre-written software on physical media), which is the most taxable of the six tax codes beneath the DC010000 header code.
Only use header codes when you're:
- Unable to find an appropriate tax code beneath the header code.
- Unable to map multiple SKUs to the different uses of a tax code (for example, a SKU for software that doesn't differentiate whether it's delivered electronically or on physical media).
As noted above, the Avalara tax codes are made of two letters and four numbers. There are two exceptions to this: FR and NT.
- FR is the equivalent of the freight code FR020100 (Shipping Only - common carrier - FOB destination).
- NT is a tax code that indicates an item that's nontaxable in all states.
These tax codes only exist because some accounting software doesn't accept eight-character codes in key areas where freight and item taxability are triggered.
P0000000 and U0000000
P0000000 is the default Avalara tax code for Tangible Personal Property (TPP). The default system logic for this tax code assumes an item is taxable in all jurisdictions. Items imported to AvaTax Update must have tax codes assigned to them, otherwise, if an item's tax code field is left blank during import, AvaTax Update assigns tax code U0000000. Items with a tax code of U0000000 should be properly mapped to a custom tax code or an Avalara tax code or else AvaTax Update will treat it as fully taxable Tangible Personal Property (TPP).
The ABC Company is a retailer of sports equipment in several states. Their product line consists of sports equipment for in-line skating, bicycling, and skateboarding. Tara in Accounting is preparing to map all products for ABC Company to Avalara tax codes. The first product on the list is a bicycle helmet.
Tara opens the Tax Code Search Tool and searches for "bicycle helmet".
Within this group of tax codes, she locates a code for "Helmets (bicycle)" with a description of "Clothing & related products (B2C) - Helmets (bicycle)." The Avalara tax code for this description is PC040307.
Tara reviews the other descriptions and finds none that more accurately represent the product. She records PC040307 for this and all other bicycle helmets sold by ABC Company.