Set up tax exemptions for your third party customers and customer sites. A tax exemption is a discount/surcharge or replacement percentage from the base tax rate that reduces the applicable tax on a Receivables transaction.
A tax exemption usually applies to a specific customer or to a combination of customer and specific product. For example, in the United States the Federal Government acting as a customer is exempt from tax on direct sales; and many states provide exemptions on sales of necessities such as food and clothing. A tax exemption record often includes an exemption certificate document number. Tax authorities provide such documents to certify that a customer, customer site, or product is either partially or fully exempt from a tax.
You create a separate record for each tax exemption that applies to the third party customer or customer site. A tax exemption record identifies the nature of the exemption, the configuration owner and tax regime, and, where applicable, the related tax, tax status, tax rate and tax jurisdiction to which the exemption belongs. Because tax exemptions apply only to specific transactions of a legal entity or operating unit, you cannot use the Global Configuration Owner to share tax exemption records.
You can enter exemption information for a customer while the customer's application for the exemption is in progress, and use the exemption reason and exemption status to monitor the exemption. If applicable, E-Business Tax considers the exemption certificate number, exemption reason, and exemption status during tax calculation. See: Managing Tax Exemptions for more information.
Note: Exemptions are applicable only at the party site level for ship-to. Bill-to exemptions are applicable only when the exemption is defined at that party level.
To set up tax exemptions for a third party, you must complete the appropriate exemption setup for the tax regimes and taxes concerned:
Set the eBTax: Allow Override of Customer Exemptions profile option to control the display of the Tax Handling field on the transaction line. See: Setting Profile Option Values for more information.
Set the Allow Tax Exemptions option at the levels that correspond to the tax exemption. For example, if the exemption refers to the tax status of a particular tax, then you must set this option at the tax regime, tax, and tax status levels.
For each applicable tax, indicate whether you are creating tax exemptions for the tax, or using tax exemptions previously created for an existing tax. You would use the tax exemptions of an existing tax, for example, in the United States when county and city taxes use the tax exemption of the state tax, if the state tax exemption applies to all cities and counties in the state. See: Setting Up Taxes for more information.
Verify that the applicable event class allows tax exemptions. If it does not, then set up configuration owner tax options for the applicable configuration owner and event class to include tax exemptions. See: Setting Up Configuration Owner Tax Options for more information.
You can create more than one tax exemption for the same customer and tax regime combination. You may need to do this, for example, if one exemption applies to a specific tax, while other exemptions apply to specific products for specific tax rates and jurisdictions. At transaction time, E-Business Tax applies the most specific tax exemption to the transaction. See: Managing Tax Exemptions for more information about tax exemption handling.
Before you can set up tax exemptions, you may need to complete one or more of these tasks:
Set up customer third parties. (mandatory)
Set up tax regimes. (mandatory)
Set up configuration options. (mandatory, if required by the event class)
Set up taxes. (mandatory, for exemptions for a specific tax)
Set up tax statuses. (mandatory, for exemptions for a specific tax status)
Set up tax rates. (mandatory, for exemptions for a specific tax rate)
Set up tax jurisdictions. (mandatory, for exemptions for a specific tax jurisdiction)
Set up exempt reason lookup codes. (optional)
Set up inventory organizations. (mandatory, for product exemptions)
Set up inventory items. (mandatory, for product exemptions)
To set up a tax exemption:
Navigate to the Customer party tax profile.
Select the third party/site and navigate to Tax Exemption tab.
If applicable, enter the certificate number that applies to this exemption.
Select the customer's exempt reason.
You can use the exempt reason lookup type to add exempt reasons according to your requirements. See: Setting Up Lookup Codes for more information.
Select the exempt status:
Discontinued - The exemption no longer applies. You set this status to an exemption that previously had the status Manual or Primary. A discontinued exemption is not considered during tax calculation.
Manual - The exemption is approved by the tax authority and applies to specific transactions only. E-Business Tax considers a manual exemption during tax calculation provided the exempt reason and certificate number entered on the transaction line match the exemption record values.
Primary - The exemption is approved by the tax authority and applies to all of this customer's transactions.
Rejected - The customer's application for this exemption was rejected by the tax authority. You set this status to an exemption that previously had the status Unapproved. A rejected exemption is not considered during tax calculation.
Unapproved - The customer's application for this exemption is not yet approved by the tax authority. E-Business Tax considers an unapproved exemption during tax calculation provided the exempt reason and certificate number entered on the transaction line match the exemption record values.
Enter the tax regime and configuration owner to which this tax exemption belongs.
Enter the tax, if this exemption refers to a specific tax. If defined, this exemption applies to the tax belonging to the party registration.
If applicable, enter the tax status, tax rate, and tax jurisdiction for this tax exemption.
If this is a product-specific exemption, enter the inventory organization and inventory item.
Enter the tax authority responsible for issuing the tax exemption.
If this exemption is for a specific tax, check the Apply to Lower Levels box to apply this exemption to all taxes that use this tax as the tax exemptions source. See: Setting Up Taxes for more information.
Enter the effective date range for this tax exemption. Enter a date range that is within the effective period of the entities related to this tax exemption: tax regime, tax, tax status, tax rate, and tax jurisdiction.
Select the method of calculating the exemption percentage:
A Discount/Surcharge decreases/increases the original rate by the percentage you enter.
A Special Rate percentage replaces the original rate.
Enter the rate percentage to use for this tax exemption.