Selecting a Tax Type

Estimated reading: 3 minutes

From compound to fixed, inclusive, normal, and withholding, learn the differences between taxes before selecting a tax type. When adding a new sales tax, you can define your tax type.

To select a tax type:

  • Go to Settings on the Sidebar.
  • Select Taxes from the expanded Navigation Menu.
  • Click New tax.
  • Enter the required details: Name and Rate (%).
  • Select a Tax type from the Type dropdown menu.
    • Compound
    • Fixed
    • Inclusive
    • Normal
    • Withholding.
  • Then, Save.

Learn the differences between the tax types.

What is a Compound Tax?

A compound tax will be calculated when you add additional taxes to an item on top of the primary tax. This tax is added to your item cost once the primary tax is added rather than calculated from the untaxed item amount.

For example, if a product costs $200 per unit and the primary tax is 4.5% VAT, and you add a compound tax of 2% sales tax, then the product’s price after taxes is $210.90. 

Compound tax is calculated as (4.5% VAT + 2% sales tax) x $200 = $210.90.

What is a Fixed Tax?

A fixed tax is a sales tax charged as a percentage of the retail cost at the point of purchase. 

Unlike a compound tax calculated on top of a primary tax, it does not change with the quantity or price of the goods sold. 

For example, if the purchase price is $35.50 and the sales tax rate is 7.4%, then the fixed sales tax is $2.63 (7.4% x $35.50).

What is an Inclusive Tax?

An inclusive tax is included in the price of a product or service. 

For example, if a product costs $100 and the tax rate is 10%, the inclusive tax price is $110. In such cases, a person must back-calculate to determine the tax value. 

Inclusive tax is different from exclusive tax, which is added to the price of a product or service at the point of sale.

What is a Normal Tax?

A normal tax is collected on retail sales of goods and services at the point of purchase. 

A normal sales tax is usually charged as a percentage of the retail cost, collected by the retailer, and passed on to the government. 

This tax may vary by state, county, and city and may have some exemptions for certain items or categories. 

For example, a state might have a 4% sales tax, a county 2%, and a city 1.5%, so residents pay 7.5% in total. A normal sales tax differs from a value-added tax (VAT), which is applied at every stage of production and distribution based on the value added to the product or service.

What is a Withholding Tax?

Withholding tax is a sales tax that is withheld by the customer from the payment to the supplier and paid directly to the tax authority. 

A withholding sales tax is imposed by some tax authorities to increase tax compliance and secure earlier receipt of tax revenues. 

For example, if a customer owes $1000 to a supplier and the withholding sales tax rate is 10%, then the customer will pay $900 to the supplier and $100 to the tax authority on behalf of the supplier. 

The supplier can then reduce its subsequent tax liabilities by the amount already paid by the customer.

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Selecting a Tax Type

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