Understanding How the Tax Engine Works

When you want to understand how taxes are applied in the Reseller Control Panel. This article explains how the Tax Engine calculates indirect taxes on invoices, how tax rules are configured, and how taxes are applied based on products, locations, and timeframes. 

A tax is a financial levy or charge imposed by the local, state, or federal government on the taxpayer. There are two types of tax:

1. Direct Tax: which are paid directly to the government by the taxpayer such as Income Tax, Corporate Tax, etc..

2. Indirect Tax: which is paid through one or more intermediaries to the government. Examples of Indirect taxes include Sales Tax, value-added tax (VAT), Service Tax, etc..

Our Tax Engine module allows you to collect any Indirect Taxes from your Customers and Sub-Resellers when you sell any product or service to them using our system.

Understanding How the Tax Engine Works

1. The Tax Engine can handle only Variable taxes as a percentage of the Invoice Amount. Any fixed amount Tax needs to be raised as a Miscellaneous Invoice separately.

2. Tax is stored against only Invoices.

   Note:

   Tax is calculated based on the amount of the invoice.

   Example:

   If you say you have configured 10% Tax on Domain Registration, then when an Order for a 10-year Registration term of USD 5 per year is added, then 10% Tax is calculated on the Invoice amount of USD 50 (USD 5 x 10 years). So the Tax amount will be 10% of USD 50, ie. USD 5. The Invoice raised would be of USD 55 and would display the following upon clicking the same:

   Invoice Subtotal: USD 50
   Tax: USD 5
   Invoice Amount: USD 55

3. A Tax Rule consists of

   • Name of the Tax (eg, Sales Tax, VAT, etc.)

   • Product Category for which the tax is applicable

   • Country and State combination to which the rule applies

   • Percentage of the Invoice amount for calculating the tax

   • Any information that you wish to display to your Sub-Resellers and Customers when an Invoice is generated under this tax rule

   • Start and End Date of this Tax Rule along with the applicable Time Zone

   • Exempted Sub-Reseller and Customer Ids

4. The system does not allow you to create conflicting tax rules, and separate tax rules need to be created for each Product/Service that you are selling for each unique State and Country combination within a set timeframe. This means that if you are selling 2 products, A and B, then you may create rules such as -

   Product Category	Percentage of Invoice Amount	Name of Tax	Country	State	Time Zone	Begin Date	End Date
   A	10	Sales Tax	Any Country	Any State	GMT	10-08-2006	10-10-2006
   A	15	Service Tax	Any Country	Any State	GMT	11-10-2006	10-08-2007
   B	6.3	Sales Tax	USA	Arizona	MST	10-08-2006	10-08-2007
   B	5	VAT	China	Beijing	Beijing	10-08-2006	10-08-2007

   Let's analyze the above example,

   • For Product A two Tax Rules have been created which are applicable to all Countries. This is only possible since they do not have overlapping timeframes ie. the second tax rule is starting after the first tax rule has ended.

   • If more than 1 tax needs to be applied for a particular Product for a unique Country & State combination, then you would need to add all tax percentages and mention the same in a single Tax Rule under an appropriately named Tax, so that your Sub-Resellers and Customers can identify which tax they are paying.

5. If you modify an existing tax rule for a Product/Service, then the system deactivates the previous tax rule and creates a fresh one for the same, with the modifications submitted.

   This implies that if say you modify the Percentage of Invoice Amount of an existing rule, it would not modify the same in the previously generated Invoices, and would only affect Invoices generated after this modification has completed. The same is applicable for any other Tax Rule parameter such as Invoice Footer.