Rules

After Determination determines which authorities have an interest in taxing a transaction, it identifies the product being taxed and, using the authority's tax rules, maps it to a specific rate or tax treatment.

Using a tax rule, you can link products to tax rates/fees and calculation methods, and take into account exemptions, special tax situations, withholding rates, and unusual calculation processing and invoice descriptions. For example, you may need to create a custom rule to apply to a tax holiday that is not supported by Determination, as explained in Sales Tax Holidays.

As transactions are processed, rules are evaluated according to their order in the rules lists for the associated authority. Rules are searched in the following order:

• Custom Rules: Rules that you create and that are specific to your implementation––are evaluated first. You can configure these rules on the Rules page.
• Cascading Custom Rules: Shared by a number of authorities of the same Tax Type (for example, County Sales and Use Tax authorities in Washington) are evaluated next. You can configure these rules on the Cascading Rules page.
• Tax Data Provider Rules: Evaluated next, followed by Tax Data Provider Cascading Rules. Unless you are a Tax Data Provider, you can only view these rules.

Rules are evaluated until a matching rule is found; the first matching rule is applied to the transaction.

Matching a Rule

At a minimum, a transaction's Determination Date must fall within the start and end date range to match a given rule. An individual rule order can be used for different rules with date ranges that do not overlap. For example, rule order 1 can be used for two rules: one with start and end dates of 1/1/2000-12/31/2005 and another with a start date of 1/1/2006.

Next, transactions must satisfy configured Rule Qualifiers before additional matching occurs. If any rule qualifiers do not match, the rule will not be applied. If all rule qualifiers match, additional matching takes place as shown in the following list.

• If the rule specifies a Product Category, the transaction must contain a value (Product Code or Commodity Code) to match the rule: either an exact match, or a match to a category higher in the product hierarchy. For example, a transaction passing a Product Category of BREAD would match a rule specifying the product category FOODSTUFFS if the Product Exceptions list contained the entry Goods:FOODSTUFFS:BREAD.
• If the rule specifies a Material List, the transaction must contain a value (Product Code or Commodity Code) whose product is contained in the list.
• The rule with the lowest Process Order that matches all of the criteria above is applied.

• You should configure a catch-all rule that specifies blank Product Category, Tax Type, Tax Code, Unit of Measure, and Exempt Reason fields. In this case, any transaction that specifies these items but does not match any other rule will be taxed at the rate specified by this rule.

  Because this rule will match all transactions, where you place it in the list is important. If you place it at the end of the list, it will be applied to all transactions that do not match higher-ordered rules. If you place it higher in the list, rules following this catch-all rule will never be applied.

• If the transaction does not satisfy any rules, an error message is generated.

• If the rule contains a Tax Type, Tax Code, Unit of Measure, and/or Exempt Reason, transaction values must explicitly match the rule. If it does not, the rule is not applied.

  If your company is configured to use the IC and VG transaction types, those calculation results will still match with NL rules. IR and ER tax results will still match with RC rules. This is to preserve backwards compatibility with previously created custom rules and ONESOURCE Indirect Tax Content.

  If you use the tax types (ER, IR, IC, or VG) on custom rules, you must consider the order of those rules to receive the desired results.

Rule Calculation Criteria

Each rule specifies a variety of calculation criteria. At a minimum, rules must specify one of the following:

• A Rate Code from the associated authority's Rates and Fees page.
• A Rate Set from the associated authority's Authority Rate Sets page. If a Rate Set is specified, a second rule lookup based on the configured rate set rates will take place.
• A No Tax indication. If this rule is processed, no Tax block will be returned for this rule and a system message will be returned.
• An Exempt indication. If this rule is processed, the entire tax will be exempted and returned as an Exempt Amount.

If a Rate Code or Rate Set are specified, you must also specify one of 14 internal Calculation Methods. Described on the Rates page, calculation methods enable everything from basic Tax on Gross Amount and Fee on Quantity calculations to advanced methods for Tax on Tax, Inclusive Amount, and Brazilian calculations. See Brazil Tax Calculations for more information on Brazilian calculations.

Optional calculation criteria parameters are:

• Related Charge: Specifies that the product referenced by the rule inherits its product taxability from a parent product. See Dependent Product Taxability for more information.
• Basis Percent: Specifies that the tax calculation will apply the mapped rate to the specified basis percentage of the gross amount. For example, if the basis percent is 75 with a gross amount of $100.00 and rate of 5.00%, $75.00 (100 x .75) will be taxed at 5% for a tax amount of $3.75.
• Input Recovery Amount or Percent: Specifies the portion of VAT that is subject to recovery when this rule is applied, expressed by an amount or percentage. The default is full recovery.
• Tax Treatment: Specifies that this tax calculation is subject to deferred and withholding tax. See Deferred Taxes for more information.

Cascading Rules

You can use a Cascading Rule to create a rate and rule or fee and rule combination that can be used by the logical child authorities of a parent authority and the owning authority itself. For example, the CA - STATE SALES/USE TAX authority contains several cascading rules that apply rates to all authorities in California.

Each cascading rule specifies an Authority Type (either "All" or a specific type such as County Sales/Use Tax); otherwise the same configuration is available as described for a standard rule as shown above.

You can set up custom cascading rules as necessary that either point to a standard rate or fee or a cascading rate or fee.

If you have cascading rates and rules configured on your system, the lookup logic is slightly more complex than if you only use rules and rates directly attached to an authority. The system attempts to find a rule in this order:

• Custom Data Provider Rule
• Custom Data Provider Cascading Rule
• Tax Data Provider Rule
• Tax Data Provider Cascading Rule

Once the rule is selected, it matches the rate specified by the rule. If there is a conflict, custom rates take precedence over tax data rates.