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Compound Taxes
For compound taxes, the total cost of a product or service is taxed at one rate, and then the total of that amount, including the first tax amount, is taxed a second time. Compound tax is also known as stacked tax.
Compound taxes use different tax rule priorities. If two tax rules with the same priority apply then the taxes are added together. If two taxes with a different priority apply then the taxes are compounded. When taxes are compounded, the first priority tax is calculated on the subtotal amount, and then the second priority tax is calculated on the subtotal plus the first priority tax amount. Lower numbers have higher priority.
Important! In order for compound taxes to work correctly do not select the Calculate off subtotal only check box when you set up your tax rules that apply to compound taxes. This check box overrides the compounding calculation and cannot be used in conjunction with compound taxes.
Example 1: Regular Two-Tax Calculation
For example, in a regular tax calculation involving two tax rules, each rule is applied separately to the product subtotal, and the taxes are added together to calculate the total tax, which is then added to the product subtotal to calculate the grand total:
-
Regular Two-Tax Calculation $50.00
+ $50.00
$100.00
Product Price
Product Price
Subtotal
$5.00
+ $10.00
$15.00
Subtotal x 1st tax rate 5%
Subtotal x 2nd tax rate 20%
Total Taxes
$100.00
+ $15.00
$115.00
Subtotal
Total Taxes
Grand Total
Example 2: Compound Tax Calculation
With compound taxes, the first tax is added to the product subtotal, and the second tax is applied to that total:
-
Compound Tax Calculation $50.00
+ $50.00
$100.00
Product Price
Product Price
Subtotal
$5.00
+ $10.50
$15.50
Subtotal x 1st tax rate 5%
[Subtotal + (Subtotal x 1st rate)] x 2nd tax rate: $105 x 10%
Total Taxes
$100.00
+ $15.50
$115.50
Subtotal
Total Taxes
Grand Total
To set up compound taxes:
| 1. | Set up all the tax rates that will be used in your compound tax rule. See: Tax Zones & Rates. |
| 2. | Set up the first tax rule for compounding. For the first tax rule, be sure that you set a higher priority than you will set for the next tax rule, which will be compounded on top of this first tax rule. Lower numbers are used for higher priority. Use 0 for the highest priority. See: Tax Rules. |
| 3. | Set up the second tax rule for compounding. For the second rule, be sure that you set a lower priority (use a higher number) than you set for the first tax rule. |