Sweet helps you setup sales tax by using Tax Categories and Tax Rates.
Products can be assigned to Tax Categories, which are then used to determine the tax rate for the products when they are purchased. One Tax Category can be set as the default for all products, which means that if a product doesn’t have a related tax category, then this default tax category would be used.
A tax category can apply to many tax rates, and a tax rate is linked to a particular zone(s). Sweet will apply the tax rate for each product that is applicable based on the product's tax category and the zone that the customer is located in.
The standard sales tax policies commonly found in the USA can be modeled as well as Value Added Tax (VAT) which is commonly used in Europe. These are not the only types of tax rules that you can setup however.
By default, without any tax categories or tax rates setup, your products are treated as exempt from tax. In order for a product to be considered taxable, it must belong to a tax category. The tax category is a concept that is specific to taxation. The tax category is never seen by your customers, so you could call it something generic like “Taxable Goods” If you wish to tax certain products at different rates, however, then you will want to choose something more descriptive (ex. “Baked Goods”).
In the simplest case, Sweet recommends at least 2 tax categories, Taxable and Non-Taxable.
A tax rate is essentially a percentage amount charged based on the sales price. Tax rates also contain other important information.
- Whether product prices are inclusive of this tax
- The zone(s) in which the order address must fall within
- The tax category that a product must belong to in order to be considered taxable.
Tax will be calculated based on the best matching zone for the order. It’s also possible to have more than one applicable tax rate for a single zone, such as a city and a state. In order for a tax rate to apply to a particular product, that product must have a tax category that matches the tax category of the tax rate.
Making Customers' Orders Taxable
The customer is considered taxable based on 2 qualifications. The first is a setting that exists on each customer that allows you to identify the customer as taxable or not. The second is that the customer's address is located within one of the zones that apply to a tax rate.
Taxes are calculated on a line by line basis. For the order to have taxes applied, the order must meet the following criteria:
- The customer is taxable
- The product has a tax category that has a non-zero tax rate
- The shipping address of the order is located within the tax rate's applicable zone(s)
1) Applying different tax rates to different zones
Let's assume you ship to 2 states, New York and Pennsylvania and that you want to charge a different tax rate for each of those
a. 4% tax for all items that ship to New York, and
b. 6% tax for all items that ship to Pennsylvania.
This will mean you need to set-up at least two different zones and assign those zones to its respective tax rates: one zone containing the state of New York and another zone containing the state of Pennsylvania. If you also wanted to charge the New York City tax, you would add a third tax rate of 4.875% and apply it to a New York City zone. When the taxes are calculated for an address within NYC, you would have a total applied tax of 8.875%.
2) Applying different tax rates for different tax category
Let us say you have you have 2 tax categories, i.e "Taxable" and "Nontaxable". Taxable would be used for all of your products that are considered taxable everywhere. Similarly, you may have a tax category called "Nontaxable" for all of your products that aren't taxable anywhere. But what do you do with a product (such as clothing) that is only taxable in some states? In this case, you would want to create a third tax category, "Clothing". This extra tax category will help us charge taxes in states where clothing is taxable, but not charge tax in states where it is not.
In our clothing scenario, let us consider Texas and Pennsylvania. Clothing is taxable in Texas, but is tax exempt in PA. To charge the taxes correctly, you would want to set up the following tax rates:
a. Texas - 8% tax rate that applies to "Taxable" items
b. Texas - 8% tax rate that applies to "Clothing" items
c. Pennsylvania - 6% tax rate that applies to "Taxable" items
d. Pennsylvania - 0% tax rate that applies to "Clothing" items
e. United States - 0% tax rate that applies to "Nontaxable" items
The last tax rate included is a wide scale 0% tax rate created by selecting a country as the zone since it is zero everywhere.