Sales Tax Setup

Overview

The sales tax framework supports many types of indirect taxes, such as sales tax, value-added tax (VAT), goods and services tax (GST), unit-based fees, and withholding tax. These taxes are calculated and documented during purchase and sales transactions. Periodically, they must be reported and paid to tax authorities.

The following diagram shows the entities of the tax setup and how they are related.

The requirements for tax calculation and tax reporting differ significantly for different countries.  Therefore the tax module for a true international ERP system must be comprehensive.  In Dynamics 365 for Finance and Operations, the tax module offers many different options for tax calculation, posting, and reporting.  Here we have a summary of the setup that is needed for sales taxes.  First we must specify our ledger posting group; when we're posting sales tax, what main accounts will be updated.  We then specify our sales tax authorities.  When we are paying sales tax, what we want to do is there we want to create a new vendor for that sales tax authority.  That gives us the ability to pay that sales tax authority.  We then specify our sales tax settlement periods, and next we specify our sales tax codes.  The sales tax codes are going to hold the tax percentage for a specific region.  Our sales tax codes are then added to our sales tax groups, which calculate total tax in a transaction, which we then assign to our ledger, our customers, and our vendors.  We also assign the sales tax codes to our item sales tax groups, which we then assign to our items.  Lastly, we have module parameters relating to sales taxes for general ledger, accounts payable and accounts receivable.  We'll now go into each one of these setups in more depth.

Sales Tax Setup

• Ledger posting groups
• Sales tax authorities
• Sales tax settlement periods
• Sales tax codes
• Sales tax groups
• Item sales tax groups
• Assign to accounts where applicable

1. Ledger
2. Vendor
3. Customer
4. Item

• Module parameters

Ledger Posting Groups

The number of accounts you must set up depends on the use of the group and national law. You can set up accounts for the following.

#	Types of accounts	Account Number	Account Name	Main account type	Main account category
1	Sales tax payable	200510	VAT Tax Payable	Liability	TAXPAY
2	Sales tax receivable	100510	VAT Tax Receivable	Asset	AR
3	Use tax expense	100520	Use Tax Receivable	Asset	AR
4	Use tax payable	200520	Use Tax Payable	Liability	TAXPAY
5	Settlement account	200530	VAT settlement	Liability	TAXPAY

Sales Tax Authorities 

Create a new tax authority to whom the final tax amount needs to be remitted. Map a vendor from Accounts payable module to this tax authority, the idea being that when the tax settlement run is done, the final tax due goes to this tax vendor.

Sales tax settlement period

Create a tax settlement period of monthly or quarterly depending on the type of tax that is being configured. Create period interval lines manually for 1st period based on the period interval duration and then for subsequent period lines, click the “New period interval”. Also note the tax authority we created in step 2 needs to be selected here in tax settlement period.

Sales tax codes

Sales tax codes are created for every indirect tax or duty that the legal entity is obligated to calculate, collect, and pay to sales tax authorities.

Enter the sales tax code and name and press SALES TAX CODE button to enter the value tax percentage.

Create two tax code one with 5% tax and another with 0% tax for excepted items or customers. below image show the created Sales Tax Codes.

Sales tax groups

Sales tax groups are groups of sales tax codes that are attached to customers and vendors. They are also attached to ledger accounts for transactions that are not posted to a particular vendor or customer. Item sales tax groups are groups of sales tax codes that are attached to resources like products. The sales taxes that apply to a particular transaction are determined by the sales tax codes that are included both in the sales tax group and in the item sales tax group of the transaction. Sales tax can be calculated only if a sales tax group and an item sales tax group are selected for each transaction for which sales tax must be calculated or recorded.

Item Sales Tax Group