Setting Up Compound (Stacked) Tax Rules in Magento (CE 1.8/EE 1.13 & Later)

Table of Contents

Note: This article provides information about how to set up tax calculations in Magento Community Edition (CE) and Enterprise Edition (EE). The information is based on CE 1.8 and EE 1.13 and later versions; some options here might not apply to earlier versions.

Important: No guarantee is offered with respect to any of the information given here. Please contact an expert before you take any decisions about tax matters.

Overview

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.

Regular tax calculation works as shown in the following figures:



An example regular tax calculation is shown in the following figures:



Compound tax calculation works as shown in the following figures:



An example compound tax calculation is shown in the following figures:



Set Up a Compound Tax

You set up a compound tax in Magento using different priorities for tax rules. 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 check the "Calculate off subtotal only" checkbox when you set up your tax rules that apply to compound taxes. This checkbox overrides the compounding calculation and cannot be used in conjunction with compound taxes.

To set up compound taxes:

  1. Set up all the tax rates that will be used in your compound tax rule.
    For step-by-step instructions, see Magento Tax Setup, Step 3: Set Up Tax Rates (CE 1.8/EE 1.13 & Later).
  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.
    For step-by-step instructions, see Magento Tax Setup, Step 4: Set Up Tax Rules (CE 1.8/EE 1.13 & Later).
  3. Set up the second tax rule for compounding. For the second rule, be sure that you set a lower priority (i.e., use a higher number) than you set for the first tax rule.

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