Skip to main content
Avalara Help Center

What parameters are used to calculate tax?

Overview

I need to know what invoice parameters are used to calculate tax. 

Environment

Avalara AvaTax

Resolution

  • There are three main levels of tax calculation: customer taxability, product taxability, and tax profile.
    • The application of these three levels results in the tax calculation you see in Avalara AvaTax, whether that transaction comes from your connector or is directly entered into the Admin Console.
  • This is the minimum required information for an invoice:
    • This gives us all of our three components of integration: customer information, item/product information, and tax profile information.
    • Once the file was imported into the Admin Console, Avalara AvaTax would fill in some more information and calculate the tax, and the document would look like this:
  • Below are primary points used in the tax calculation from the invoice:
    • Customer Taxability:
      • First, we have our customer taxability fields: Exemption Number, Entity/Use Code, and (if you have ECMS enabled and are managing certificates in the Admin Console) Customer/Vendor Code.
      • If the customer is flagged as exempt, that will put any sales in that Transaction in the Exempt bucket for applicable Jurisdictions, and no sales tax will be charged on them, regardless of product taxability.
      • Most methods of customer-based exemption are exempt in all triggered jurisdictions, but some notable exceptions do exist.
        • In those cases, the sales are only exempt in the applicable jurisdictions, and all other sales are subject to item taxability as normal.
    • Exemption Number: This is a field that, if it is populated with data, exempts the transaction from sales tax entirely.
      • If, in the import document, we had populated cells Z2 and Z3 with EXEMPT, the transaction would be exempt from sales tax.
      • You can’t see theExemption Number reported in the Document Detail view from the Transactions tab, but it is exposed if you drill into Document Edit Mode.
    • Entity/Use Code: This field associates a customer taxability profile with a transaction.
      • This can be one of the system-set customer taxability profiles (e.g. Retail or Local Government), or it can be one that you have created rules for in the Admin Console.
      • If cells G2 and G3 had been populated with in the import document, Avalara AvaTax would know that this corresponds to a retailer, and the transaction would be exempt in all jurisdictions.
    • Customer/Vendor Code: This is only a concern if you’re managing exempt customers through the ECMS in the Admin Console.  
      • If the customer code matches an exemption certificate on file, the destination address is in a state listed in the Regions Applicable on a non-revoked certificate, and the transaction falls within the listed date range, the certificate will be applied to the transaction.
      • This application is also contingent on your ECMS settings.
  • Product Taxability:
    • The taxability of the tax codes passed in the destination state determines the item taxability. Attached are taxability matrices for two such codes, SC100502 and PC070000.
      • If the Tax Code assigned to the line in column I is taxable in the destination state, the sales are flagged as taxable.
      • Similarly, if a code is non-taxable in a given state, the sales are flagged as non-taxable and tax is not assessed.
      • A few codes are pro-rated at different levels of taxability (e.g. half-taxable, or taxable dependent upon the taxability of other items on the transaction).
      • If no tax code is passed, Avalara AvaTax assumes that items are taxable in all states, and assigns the system default code of P0000000.
  • Tax Profile:
    • Once the taxability of the customer and items have been established, the sourced rates are applied to the transaction. 
      • First, sourcing is established; some states source some jurisdictions or products at the origin address for intrastate transactions.
      • Then, those addresses are used to pull the appropriate taxing jurisdictions based on your tax profile and nexus designation.
        • Sales tax or seller’s use tax is charged depending on your nexus type.
          • Those rates are applied at the line level to your taxable sales.