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What are Tax Depends and Tax Hinge?

Overview

What are Tax Depends and Tax Hinge, and how do they apply to freight taxability?

Environment

Avalara AvaTax

Taxability of freight in most states using Tax Depends   

The taxability of freight depends on the taxability of other products on the associated transaction. Taxability is based on the tax code used in the transaction and the tax dependency level for Freight and Handling that you have selected for your company. Tax Depends is only for Product tax codes; services tax at the Destination address.

  • When an item is shipped that is non-taxable, freight is not taxed
  • When an item is shipped that is taxable, freight is taxed
  • When there are both taxable and non-taxable products in a transaction, "Tax Depends" logic is applied to determine the taxability for freight

Tax Depends logic takes a proportion of the taxable vs non-taxable products and uses that proportion to determine taxability. 

Example:

  • Item 1: $100 (Taxable)
  • Item 2: $100 (Non-Taxable)
  • Total cost of items: $200
  • Freight cost: $10
  • Freight cost that is taxable: $5
  • Freight cost that is non-taxable: $5
  • The total amount on the invoice is $200 and 50% of that total is taxable. Therefore, 50% of the freight is taxable and 50% is non-taxable.

Taxability of freight in NY and PA using Tax Hinge 

Some states, like NY and PA, handle a mix of taxable and non-taxable items differently.

If there are any taxable products on a transaction in these states, freight becomes fully taxable. In AvaTax, this is called Tax Hinge and applies to transactions in NY and PA.

Non-taxable codes and Freight

  • NT is a code for a non-taxable product and is taken into consideration when determining the taxability of freight. It should not be used for fees or services
  • ON030000 is a non-taxable "other" code which is not taken into consideration when determining the taxability of freight. It should be used for fees, services, or pass-through costs

If a miscellaneous fee is mapped to "NT" on an invoice, it will enter the freight calculation and may cause incomplete taxation of freight on a shipment of taxable products.

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