Compound Tax Rules

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. For example, in Quebec and Prince Edward Island (PEI) in Canada, the Canada General Sales tax is calculated and added to the price of a product. Then the Quebec or PEI provincial tax rate is calculated for that total amount, which is added to the previous total. Compound tax is also known as stacked tax.

For field descriptions, see Configuration: Sales - Tax

The general calculation looks like this:

Product Price
+ Product Price x GST
+ (Product Price x GST) x QST
Total

For this example you will set up a general sales tax rate for Canada and a provincial tax rate for Quebec, and then set the tax rule so that the two taxes are compounded.

Step 1: Set Up the Tax Rates

If you don't have them already, create two tax rates, one for Canada general sales tax (GST) and one for Quebec provincial sales tax (QST).

  1. From the Admin panel, select Sales > Tax > Manage Tax Zones & Rates.
  2. Click the Add New Tax Rate button.
  3. In the Tax Rate Information area, complete the following fields:
    1. Tax Identifier: For this example, enter GST for the Canada general tax rate and QST for the Quebec sales tax. Make sure to not include spaces in this field. This identifier is not visible to customers if the alternate Tax Titles section is used.
    2. Country and State: Select the country and state to which the specific tax applies. For this example set the Country to Canada for both rates, and set the State to Quebec for the QST rate.
    3. Zip/Post is Range: For this example, set to No.
    4. Range From / Range To: Not applicable for this example.
    5. Rate Percent: Enter the tax rate as a percentage number. For this example, for GST enter 5, and for QST enter 8.5.
    6. Tax Titles: Tax Titles let you name your tax rate. This is helpful if you have a store that is translated into different languages and you use the same tax rates for all languages.
  4. Click the Save Rate button to save your changes.

Step 2: Set Up the First Compounding Tax Rule

  1. From the Admin panel, select Sales > Tax > Manage Tax Rules.
  2. In the Manage Tax Rules area, click the Add New button to add a new tax rule.
  3. In the Tax Rule Information area, complete the following fields:
    1. Name: Enter a name for this tax rule that will make it easy to identify. For this example, use Canada GST.
    2. Customer Tax Class: Select the customer tax class to apply this rule to. For this example, select Retail Customer.
    3. Product Tax Class: Select the product tax class to apply this tax rule to. For this example, select Taxable Goods.
    4. Tax Rate: Select the tax rate to apply for this tax rule. For this example, select GST.
    5. Priority: Specify the importance of this tax rule by giving it a number value. Lower numbers have higher value. If two tax rules have the same priority number, their taxes are added together. Otherwise their taxes are compounded. For this example, enter 0 for the priority. This means that in this example, for GST and QST, GST is calculated first and then QST is compounded on top of GST.
    6. Sort Order: Set the sort order to 0. The Sort Order determines the sequence in which this rule appears when listed with other rules.
  4. Click the Save Rule button to save your changes.
  5. Step 3: Set Up the Next Compounding Tax Rule with a Different Priority

    In this step, you will add the next tax rule and give it a different priority to enable tax compounding.

    1. From the Admin panel, select Sales > Tax > Manage Tax Rules.
    2. In the Manage Tax Rules area, click the Add New button to add a new tax rule.
    3. In the Tax Rule Information area, complete the following fields:
      1. Name: Enter a name for this tax rule that will make it easy to identify. For this example, use QST.
      2. Customer Tax Class: Select the customer tax class to apply this rule to. For this example, select Retail Customer.
      3. Product Tax Class: Select the product tax class to apply this tax rule to. For this example, select Taxable Goods.
      4. Tax Rate: Select the tax rate to apply for this tax rule. For this example, select QST.
      5. Priority: For this example, enter 1 for the priority. This means that in this example, for GST and QST, GST is calculated first and then QST is compounded on top of GST.
      6. Sort Order: Set the sort order to 1. The Sort Order determines the sequence in which this rule appears when listed with other rules.
    4. Click the Save Rule button to save your changes.
    5. You can test your tax compounding by making a test order in your storefront and seeing how your store calculates compound tax.

      See also:

      Understanding Tax Settings

      Video: Set Tax Calculation

      Video: Optimize Your Tax Settings

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