location based tax case study

8/11/2019 Location Based Tax Case Study

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How Location Based Tax Works in R12 E-Business Tax (EBTax) - Includes sample setup [ID1133994.1]

Modified14-MAR-2011 TypeHOWTO StatusPUBLISHED

In this DocumentGoal

Solution

1. How Location Based Taxes Work

a. What is a location based tax

b. How are Sales Tax and Use Tax Different?

c. How Does E-Business Tax Determine That a Location Based Tax Should Be Applied and find the Rate?

2. Setup Required For A Simple Example

a) Create a Tax Regime & Associate to the Operating Unit

b) Create the Tax and Link to the Geography Type

c) Create the Tax Status for each Tax

d) Setup (or verify) TCA Geography Hierarchy and Validation

ii) County Code

iii) City Code

iv) Ensure Validations Are Set

v) Run Geography Name Referencing Program for HR_Locations_ALL and HZ Locations

e) Define Tax Jurisdictions

f) Define Tax Rates

g) Set Default Tax Rules and Enable Tax

h) Test

3) Troubleshooting

Applies to:

Oracle E-Business Tax - Version: 12.0.0 and later [Release: 12.0 and later ]Oracle Receivables - Version: 12.0.0 and later [Release: 12.0 and later]Information in this document applies to any platform.

Goal

E-Business Tax (EBTax) Inform ation Center> Regime to Rate Setup> Note 1133994.1

This note provides an overview of how Location Based taxes work in Release 12 E-Business Tax. Forthe purposes of this note the scenario has been greatly simplified and we are focused only on the itemscritical for location based taxes to derive a tax on a transaction.

Solution

1. How Location Based Taxes Work

a. What is a location based tax

A location based tax is a tax that is applied based upon the "Place of Supply". In most cases the place ofsupply represents the location where the goods were received/consumed or services were provided.
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For Example: Purchasing a widget in San Jose, California at a cost of $100, results in the additionalassessment of state, county and city taxes that apply to that location. In this case we might be assesseda State tax rate of 8.25% and a City tax rate of 0.5%. (These are not real rates. Also in this example thecounty does not levy a sales tax)

b. How are Sales Tax and Use Tax Different?

Sales tax is levied by the seller and is typically (though not always) required to be collected by partieswith a physical presence in the taxing geography (State, Country, etc).

Use tax is a self-assessed tax that is levied by the buyer. In most locations with a sales tax, the taxingauthority requires that the buyer self-assess whenever they purchase goods that are subject to tax andwhere the seller did not charge and collect the tax on the purchase. For more on Self-Assessing Usetax, refer toNote 948414.1How to Configure a Tax for Automatic Self-Assessment in R12 E-BusinessTax and Payables

c. How Does E-Business Tax Determine That a Location Based Tax Should Be Applied andfind the Rate?

For the sake of this example we will ignore advanced tax rule creation. If you have complex scenariosyou should review the "Tax Rules" section ofNote 1117544.1E-Business Tax Information Center.

There are 6 elements that must exist in order for a location based tax to be applied.

1. The Tax Regime must be associated with the Operating Unit where the transaction isbeing created (Via the party tax profile)

2. A Tax must exist within the regime with a geography specified (say State) and must be"available for transactions".

3. TCA Geography Hierarchy must contain the geography (ex: California must exist as astate in TCA)

4. A Tax Jurisdiction for the Geography on the transaction must have been defined (again -

California in our example)5. A Tax Rate must be defined and set as the "Default" rate.6. The Place of Supply rule must be defined to point to the proper address from the

transaction (In this example let's say "Ship To, Use bill to if Ship To is not found"

When a transaction is created, the system will apply the tax as follows:

1. Find the Operating Unit on the transaction and identify the regime that is associated2. Find the Tax or Taxes (Ex: State) and Status3. Find the place of supply geography (ex: State = Caifornia) identified for the tax (on the

rules page)4. Check to see if the place of supply Geography has a Jurisdiction defined under the Tax5. If no jurisdiction exists the tax will not be applied

6. If a jurisdiction exists then the tax engine will look to see if a tax rate exists for thisjurisdiction with the "Default" checkbox checked. If it does this tax rate will be applied.(Ex: Tax rate for california of 8.25%)

7. If a jurisdiction exists but no tax rate exists with the jurisdiction, the system will search fora tax rate without a jurisdiction (null jurisdiction). If one is found and the "default tax rate"checkbox is checked then the corresponding tax rate will be used.

8. If a jurisdiction exists but no tax rate exists with a jurisdiction and no "Null" jurisdiction taxrate exists then an error will be generated.
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2. Setup Required For A Simple Example

a) Create a Tax Regime & Associate to the Operating Unit

Responsibility: Tax ManagersNavigation: Tax Configuration > Tax Regimes > Create

Be sure that you select "Allow Multiple Jurisdictions" so that you can define jurisdictions for each city,county and state.


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b) Create the Tax and Link to the Geography Type

Use the regime to rate icons on the regime created above to "Create a Tax". For this United Statesexample we will create three taxes (State, County and City)

State Tax: Note that the Geography Type is "State"

This screenshot shows the checkbox "Make tax available for Transactions" as checked. This step isperformed after all tax rules have been set. Normally is not visible when creating a tax.

County Tax: Again note that the parent geography type must be Country (not State)


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City Tax: Again note that the parent geography type must be Country (not County)

c) Create the Tax Status for each Tax

Each tax must have at least one tax status. In most cases for the US a single tax status is sufficient. The

screenshot below shows a tax status for State. Not shown are the setups for City/County which arecreated in a similar fashion.


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d) Setup (or verify) TCA Geography Hierarchy and Validation

i) State CodeResponsibility:Trading Community ManagerNavigation:Administration > Geography HierarchyQuery the Country Code"US" and select view details


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ii) County Code

iii) City Code

iv) Ensure Validations Are Set

Since location based taxes require that a link be defined between the geography name on the transactionand the jurisdiction, it is critical that tax validation be enabled. This forces users entering customers andtransactions to enter addresses that ave validated against the TCA structure.


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v) Run Geography Name Referencing Program for HR_Locations_ALL and HZ Locations

Again, because the location based taxes require a relationship between geography and jurisdiciton, it isimportant that each unique location be valid. The relationships are validated through the "Geography

Name Referencing Program". This program must be run for ALL new geography elements you create.Make certain you run this for both HR_LOCATIONS_ALL and HZ_LOCATIONS. (HR Locations are theOperating Unit, Legal Entity and Warehouse addresses while HZ Locations represent Customer andVendor addresses).

Common Error: System cannot determine geographical information for this location and cannot derive atax jurisdiction when entering an transaction

If an address is not valid and an invoice is entered, the following error will be generated: System cannot


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determine geographical information for this location and cannot derive a tax jurisdiction when entering antransaction

Note 438718.1discusses steps to debug and resolve the issues with the address in question.

e) Define Tax Jurisdictions

Tax Jurisdictions must exist for the geography you specified on your tax. If a Jurisdiction is not definedthen the tax will never be derived via Location Based Taxes.

Tip: If you want to see a tax line for all three tax types in all cases, even when no tax exists, create thejurisdiction but do not define a jurisdiction based tax rate. Then create a tax rate for the tax with a nulljurisdiction and a zero percent rate. This zero rate will be used for cases where no tax is levied and azero dollar tax line will be generated.

State Note that at least one jurisdiction must be set as default for each tax

County
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City

f) Define Tax Rates

Create Tax Rates for each Jurisdiction where a rate exists plus create a tax rate with a null jurisdicitonand a zero rate for each tax. This second zero rate tax ensures that errors are not generated for anyjurisdictions that might exist without a rate.

State: Be sure to set as default


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County: Note that the jurisdiction is null. As discussed above a similar no-jurisdiction rate is suggestedfor each tax.


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City: Be sure to set as default


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Note: In some cases a tax zone may be required to assess a specific rate for a set of zip codes within acity. To setup a tax rule using a tax zone, refer toNote 1124208.1How To Setup and Troubleshoot TaxZones and User Defined Geography Tax Rules in R12 E-Business Tax

g) Set Default Tax Rules and Enable Tax

Once the above steps are completed, make certain that you have default tax rules defined. For this

example the tax is set as always applicable and the place of supply rule is set as shown below.
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Also Return to each tax and check the checkbox to "Make available for transactions"

h) Test

In this example we are showing how the results will work in Receivables. This setup will also work in AP.

Notice in this first screenshot that the address segments match those from the earlier setup


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Next we enter an invoice line and as shown below the taxes automatically calculate using only the taxsetup we created above (and no special tax rules)


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3) Troubleshooting

Some helpful resources to troubleshoot the setup discussed above include:

Note 1117544.1EBTax Information Center

Note 577996.1Case Study: Setup R12 E-Business Tax for Canada: Includes 2010 HST Changes Note 1082172.1Overview and Basic Troubleshooting of Tax That Does Not Calculate in R12 E-

Business Tax (EBTAX)
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