Magento CE 1.8 and EE 1.13: Recommended Tax Configurations and Best Practices

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; 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 make any decisions about tax matters.

Overview

This article discusses some potential issues you might encounter when configuring Magento tax calculation and display options, explains some tax calculations in detail, and provides recommendations for tax settings for US, EU, and Canadian stores.

Important: For specific information about tax-related bug fixes in this release, see the Magento Enterprise Edition (EE) 1.13 Release Notes.

Note: If your business generates more than $2 million in annual revenue we recommend the use of a third-party transaction tax solution provider. Some third-party providers can also handle the accrual and payment of taxes to multiple jurisdictions.

Problem Configurations and Related Display Issues

Tax calculations in Magento offer a considerable amount of flexibility to meet your store's legal requirements, your preferences, and the expectations of your customers. As such there are some combinations of tax-related options that can result in customer credibility issues due to how tax is calculated and displayed to your customers.

Certain tax configurations in Magento can create customer confidence issues resulting in cart abandonment. In general these conditions occur when the tax calculation method is set to Row or Total and a customer is presented with prices excluding and including tax, or tax on an item basis in the cart. In this instance, due to how rounding is done for tax calculation, there can be differences between the amount shown in the cart and the amount a customer expects to pay. These differences—if noticed by a customer—usually end up as cart abandonment, so you should avoid the problematic tax configurations.

Problematic configurations are discussed in the following sections:

Catalog Prices: Excluding Tax

These settings are available in the Admin Panel at System > Configuration > SALES > Tax > Calculation Settings, options Catalog Prices and Tax Calculation Method Based On.

Price Display Tax Calculation Method Based On
Unit Price Row Total Total
Excluding tax OK OK OK
Including tax OK OK OK
Including & Excluding tax OK OK WARNING

If you set up your tax calculation settings in ways that trigger any of the problematic configurations discussed in this section, the following notifications display.

In this error message, the source link points to this article. The Tax configuration link takes you to System > Configuration > Sales > Tax in the Admin Panel. There you can change your tax settings to avoid the problematic configurations detailed above.

For more detailed information, see Magento Tax Setup, Step 2: Configure General Sales Tax Options (CE 1.8/EE 1.13).

Catalog Prices: Including Tax

These settings are available in the Admin Panel at System > Configuration > SALES > Tax > Calculation Settings, options Catalog Prices and Tax Calculation Method Based On.

Price Display Tax Calculation Method Based On
Unit Price Row Total Total
Excluding tax OK OK OK
Including tax OK OK OK
Including & Excluding tax OK WARNING WARNING

If you set up your tax calculation settings in ways that trigger any of the problematic configurations discussed in this section, the following notifications display.

In this error message, the source link points to this article. The Tax configuration link takes you to System > Configuration > Sales > Tax in the Admin Panel. There you can change your tax settings to avoid the problematic configurations detailed above.

For more detailed information, see Magento Tax Setup, Step 2: Configure General Sales Tax Options (CE 1.8/EE 1.13).

Discounts: Apply Customer Tax and Apply Discounts on Prices

This section discusses Magento recommendations for the following options available in the Admin Panel at System > Configuration > SALES > Tax > Calculation Settings:

Magento Recommendation for Apply Customer Tax

Magento strongly recommends all merchants set Apply Customer Tax to After Discount, regardless of all other tax-related settings. This avoids issues with calculating the total product price.

Magento added a new notification for applying customer tax for discounts in EE 1.13.1. This notification applies to EE 1.13.1 only. If you use EE 1.13.0.x or earlier, the notification discussed in this section does not display; however, Magento's recommended setting still applies to you.

In EE 1.13.1 or later, regardless of any other settings on this page, if you click Before Discount from the Apply Customer Tax list, the following notification displays:

Magento Recommendation for Apply Discounts on Prices

Magento recommends the following settings:

  • US and Canadian merchants: Set the value of Apply Discount On Prices to Excluding Tax.
  • EU merchants: Set the value of Apply Discount On Prices to Including Tax.

Shopping Cart

The following figure shows an example of a shopping cart in a problem configuration.

Tax Calculation Details

This section discusses the following topics:

Tax Calculation Methods

Tax calculation method options include Unit Price, Row Total, and Total. The following table explains how rounding is handled for the different settings.

Option Calculation and Display
Unit Price Magento calculates the tax for each item and displays prices tax-inclusive. To calculate the tax total, Magento rounds each of the item taxes individually and then adds them together.
Row Total Magento calculates the tax for each line. To calculate the tax total, Magento rounds each of the line item taxes and then adds them together.
Total Magento calculates the tax for each item and adds those tax values to calculate the total unrounded tax amount for the order. Magento then applies the specified rounding mode to the total tax to determine the total tax for the order.

Options for Handling Catalog Prices: With or Without Taxes

  • Catalog prices without tax: Using this setting, the base item price is used as it is entered and the tax calculation methods are applied as explained above.
  • Catalog prices with tax: Using this setting, the base item price excluding tax is calculated first. This value is used as the base price, and the tax calculation methods are applied as discussed previously.

Important: Changes have been made from prior versions of Magento for EU merchants or other VAT merchants who display prices including tax and operate in several countries with multiple store views. If you load prices with more than two digits of precision, Magento automatically rounds all prices to two digits to ensure that a consistent price is presented to buyers.

Display Options

The possible display fields vary depending on the calculation method and whether the catalog prices include or exclude taxes.

Note: A display field means that there is a two-decimal-place precision as part of the normal computation.

How to Display Tax Amounts as Line Items Without Compounding Tax

To get two different tax amounts to be displayed as separate line items, such as GST and PST for Canadian stores, you must set different priorities for the related tax rules. However, in previous tax calculations, taxes with different priorities would automatically be compounded. To correctly display separate tax amounts without an incorrect compounding of the tax amounts, you now set different priorities, but also select the check box for Calculate off subtotal only. This results in correctly calculated tax amounts that are shown as separate line items in tax displays.

For detailed configuration recommendations for Canadian stores, see Recommended Tax Configuration for Canadian Stores (Magento CE 1.8 and EE 1.13).

Shipping Tax

The following table discusses shipping tax options.

Shipping Setting Display Calculation
Shipping (without tax) Displayed without tax Normal calculation. Shipping is added to cart total, typically displayed as a separate item.
Shipping with Tax Can be displayed tax inclusive or tax can be displayed separately Shipping is treated as another item in cart with taxes, using the same calculations.

The following table shows an overview of tax configuration recommendations. Following the table are links to detailed configuration examples for each of these recommendations.

Tax options US UK B2C UK B2B Canada
Load catalog prices Excluding tax Including tax Excluding tax Excluding tax
FPT No because FPT is not taxed Yes, including FPT and description Yes, including FPT and description Yes, including FPT and description, and apply tax to FPT
Tax based on Shipping origin Shipping address Shipping address Shipping origin
Tax calculation On total On total On item On total
Tax shipping? No Yes Yes Yes
Apply discount Before tax Before tax, discount on prices including tax Before tax, discount on prices including tax Before tax
Comment All tax zones are the same priority; ideally, a zone for state and one or more zones for zip code lookup For merchants marking up supplier invoices (including VAT)

For B2B merchants to provide simpler VAT supply chain considerations. Tax calculation on row is also valid; however, please check with your taxing jurisdiction.

Setup assumes a merchant is in the supply chain and that goods sold are used by other vendors for VAT rebates and so on. This makes it easy to discern tax by item for faster rebate generation.

Note that some jurisdictions require different rounding strategies not currently supported by Magento, and that not all jurisdictions allow item or row level tax calculation.

Following is important information specific to Canadian provinces. Be sure to consult a qualified tax authority for any questions.

  • A merchant located in a GST/PST province (Montreal) should create one tax rule and show a combined tax amount.
  • Click here for important information for merchants located in Quebec.
  • Click here for important information for merchants located in Saskatchewan.
  • Click here for important information for merchants located in Manitoba.

For More Information

Discussion:

RSS: New Article posts

Explore the Knowledge Base