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Best Practices for Selecting AvaTax System Tax Codes

This article applies to:Avalara AvaTax

Your AvaTax subscription gives you access to all AvaTax System tax codesHoverTT.png . Choosing codes that are appropriate to your business is required before you Get Started with AvaTax.

To help choose the appropriate AvaTax System tax codes, here is a list of some of the more common industries that use AvaTax. Tax codes normally associated with software and services companies are broken down by the product offered. Based on past customer experience, the key areas of the AvaTax System tax codes to focus on are listed below.

Products

The AvaTax System tax codes DC section (downloaded software & licenses) covers most products. The main consideration is the method of delivery (physical media, electronically downloaded, or load and leave).

  • Physical media – The customer receives software on something tangible, such as a CD or DVD
  • Electronically downloaded – The customer downloads the software electronically (typically from an Internet site) rather than receiving physical media
  • Load and leave - In a load and leave transaction, the vendor does not transfer the tangible medium used to load the software to its customer as part of the sale. Rather, the vendor retains the tangible medium to be used in similar subsequent transactions. This is often used in cases where the size of the program precludes the buyer from downloading it, thus the vendor may travel to the customer’s site and install the software directly onto the customer’s computer using tangible storage media.

Implementation

  • SC07 section (implementation services associated with sale of software)
  • SC08 section (implementation services not associated with sale of software [e.g. third-party product])

If the implementation services include installing and configuring the software, go to the 100 (canned/prewritten) or 200 (custom software) sections. If it is training only, go to the 300 section. More detailed AvaTax System tax codes are determined by the delivery method.

Maintenance agreements

  • SC09 section (maintenance agreements [custom software])
  • SC10 section (maintenance agreements [canned or pre-written])

These AvaTax System tax codes are broken down between optional (100, 300 and 500 sections) and mandatory (200, 400 and 600 sections), further refined by method of delivery and whether or not software updates are included as part of the agreement.

Technical support services

These AvaTax System tax codes use the same format as maintenance agreements (optional vs. mandatory, method of delivery, software updates vs. services only). These sections are used for support services provided outside the scope of a maintenance agreement.

  • SC12 section (technical services [custom software])
  • SC13 section (technical services [canned or pre-written])

Data access and processing

Use the AvaTax System tax codes for data access and processing related fees.

  • SD020100 (data access fees)
  • SD020901 and SD020902 (data processing fees)
  • SD021100 (data storage & retrieval)

Website services

Use the AvaTax System tax codes for fees related to website services.

  • SW050000 (Design & maintenance)
  • SW050400 (Hosting)
  • SW050500 (Access)
  • SW052000 (ASP hosted software (software-as-a-service))

Other services

Refer to the list below to find the appropriate tax codes for software-related services not included in the categories above.

  • SC160000 (General consulting services)
  • SC160000 (Systems consulting)
  • SP140000 (Other professional services)
  • ST040100 (Non-software tech support)
  • ST080000 (Training (not related to software implementation))
  • SI060000 (Internet access –-only use this if you are an Internet service provider (ISP))
  • SI080000 (IT monitoring services)

Computer hardware vendors

Use the ‘100’ AvaTax System tax codes when the service is being charged along with a product (for example, the customer is billed for parts & equipment, even though the service is stated separately).

Use the ‘200’ AvaTax System tax codes when you are only billing for labor (for example, the installing third-party equipment, or making repairs that don’t require the purchase of additional parts).

Tax codes normally associated with computer hardware vendors are:

  • PC07 (business-to-business) and PC08 (business-to-customer) sections ( Computer equipment)
  • SM020200 and SM020400 (Hardware maintenance agreements)
  • SI020100 and SI020200 (Hardware installation)
  • SR060100 and SR060200 (Hardware repairs)

Clothing vendors

AvaTax System tax codes for clothing are found in the PC03 and PC04 sections.

The PC03 section is for business-to-business sales, while the PC04 section is for business-to-customer.

AvaTax System tax codes PC030100 and PC040100 (Clothing & related products - General) can be used for clothing products not listed elsewhere (for example, t-shirts or blouses). Clothing is taxable in most states, but a handful either exempt certain clothing items (for example, Minnesota, Pennsylvania), or impose thresholds (for example, New York, Connecticut).

Food products vendors

Food products are found in the PF05 and PF11 sections. The PF11 section is only used for prepared foods (for example, foods served in restaurants, cafeterias, etc.).

The PF05 section is divided into:

  • PF050100 and PF050200 (beverages)
  • PF050300 (candy)
  • PF050700 (dietary supplements)
  • PF050800 (health foods)

If a product is not listed, the AvaTax System tax codes PF050001 (food and food ingredients – general) might be used. This AvaTax System tax code is tailored to the specifications of food as defined by the Streamlined Sales and Use Tax Agreement (SSUTA).

According to the SSUTA, food & food ingredients means substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value. Food and food ingredients does not include alcoholic beverages or tobacco.

Health products vendors

Most products are found in the PF05 and PH05 sections. Health foods are in the PF050800 section, while health care items (like grooming and hygiene products or medical drugs) are located throughout the PH05 section. There are differentiations for prescription vs. non-prescription products, and medicated vs. non-medicated products. Please remember that header codes (for example, PF050800 or PH050500) can be used if you are unable to find specific AvaTax System tax codes for your products.

Medical suppliers

A variety of AvaTax System tax codes can be applied to medical devices and supplies. This is an industry in which it is often difficult to determine the proper AvaTax System tax code to use. AvaTax includes some tax codes for medical products, services, or charges, but it is not possible to account for the wide range of definitions that states apply to products, services, or charges used in this industry.

The best approach is to find an AvaTax System tax code with a description similar to your product, service, or charge and create tax rules if needed in states where a variation in taxability is triggered by your company’s specific usage of the item, or due to the nature of your business. Alternatively, create your own tax codes and apply your own research by entering tax rules for the states in which you have a “substantial physical presence.” The Avalara Tax Compliance Department is staffed with specialists who can do the tax research for you, and professional fees apply as the time for completing the research can vary. If you decide to have the Avalara Tax Compliance Department do the research, please consult with Avalara Support for further details.

Tax codes normally associated with the medical industry are:

  • PH05 Tax codes (the 200, 300 and 400 sections focus on medical equipment)
  • SC160000 (consulting) or SP140000 (professional services)
  • SM020200 or SM020400 (hardware maintenance agreements)
  • ST080000 (training and seminars)

For more information, see federal medical device excise tax.

Manufacturers

Manufacturers generally sell taxable items. Often only a small number of products, services, or charges need to be coded for many manufacturing customers. Since most equipment and parts are taxable, and AvaTax treats non-coded products as taxable products (passing tax code P0000000 by default), it might be feasible to simply map service products and freight. Tax codes normally associated with manufacturing firms are:

  • SI020100 and SI020200 (installation services)
  • SM020200 and SM020400 (hardware maintenance agreements)
  • SR060100 and SR060200 (repair services)

Freight

The most common AvaTax System tax codes for freight are FR020100, FR020200, FR020800 and FR030000.

FR020100 and FR020200 represent ‘shipping only’ charges via common carrier. In these AvaTax System tax codes, the cost of shipping is simply passed on to the purchaser (no additional charges), and the product is delivered through a common carrier like UPS, FedEx, US Postal Service, etc. The difference between the two is determined by when the title transfer of the product takes place. If the title is transferred at the point of delivery, use AvaTax System tax code FR020100 (FOB destination). If the title is transferred when the product leaves the shipping dock, use code FR020200 (FOB origin).

FR020800 represents a freight charge that is ‘bumped up’ from the vendor’s shipping cost, or has a built-in profit margin. States like California and Massachusetts stipulate that freight charges are exempt from sales tax only if they are a pass-through of the vendor’s shipping cost.

FR030000 represents a single freight charge that includes both shipping and handling. If shipping and handling charges are stated separately, use OH010000 for the handling charges, and one of the other freight codes (for example, FR020100, FR020200) for the shipping.

The following states return the AvaTax System tax code FR020100 as taxable, but can be considered exempt under certain conditions:

  • Colorado: If the seller allows the purchaser the option either to use the seller’s transportation services or use alternative transportation services.
  • Florida: If the purchaser can elect to avoid the charge for transportation services (for example, by picking up the product).
  • Illinois: If the seller and the buyer agree upon the transportation or delivery charges separately from the selling price of the tangible personal property.

If deemed exempt, a tax ruleHoverTT.png can be entered to override the taxability of these AvaTax System tax codes.

Canada

Use AvaTax System Tax Codes in Canada to ensure product-specific tax calculation for your goods and services.

Unavailable codes

The following categories of items are currently not available with AvaTax System Tax Codes:

Products used in the manufacturing process

Manufacturing or packaging materials normally require the purchaser to be a manufacturer, or to use the product for manufacturing purposes; therefore, exemptions should be set up at the customer level. Use an exemption certificate entry or a tax rule with an entity use code specifying which products qualify for the exemption.

Manufacturing or packaging materials are not currently covered by AvaTax System tax codes.

Rental of products

Some states apply special rates for rentals (for example, Alabama cities).The rental of products is not currently covered by AvaTax System tax codes.

Medical devices

While some AvaTax System tax codes are available for medical products (for example, durable medical equipment, prosthetic devices), there are many specialized segments of the industry with devices that are not currently covered by AvaTax System tax codes (for example, surgical implants). For more information, see federal medical device excise tax.

Job costing materials

In many states, there are complex rules governing how labor and materials are treated in job costing scenarios. In such scenarios, a contractor purchases materials from suppliers prior to invoicing. Job costing materials are not currently covered by AvaTax System tax codes.