Does the word “taxes” make you want to crawl under your desk? We get it. But crawl back out from under there, because we need to have a quick chat on what line-level taxes are and why they matter. It won’t be scary. We promise.
Essentially, there are two main methods of calculating tax on a sales document. You can either apply a single rate that is used to calculate taxes for each line (apply document-level taxes), or you can apply a unique rate to every line (apply line-level taxes).
Which method should you use? Well, it depends on what you are selling. If you are selling certain items that are taxed differently from other items (food, for example), you need to be able to apply line-level taxes if these two types of items are going to be sold on the same sales document (and if you’re filling out multiple invoices to avoid this issue...you’re doing it wrong).
Where you are selling is also an important factor. If your business has a nexus in more than one state (essentially, a “significant presence” such as a store, warehouse, or employee), you will most likely need to be able to apply line-level taxes to your sales documents as well. Additionally, some areas of the country have county or city sales taxes to be aware of.
There’s no doubt that sales taxes can get complicated, and every state has different rules about sales taxes. If you’re not sure what each state requires of you, check out this helpful resource from TaxJar.
Yes, but what is it?
Let’s dive into what exactly line-level taxes are a little more by walking through a few theoretical sales documents from some example stores. All three stores are located in Grand Rapids, MI, where there is a 6% sales tax on all goods except for unprepared foods (groceries).
Our first example sales document comes from a single brick-and-mortar stationary and paper products store. A customer enters the store and purchases some cards and envelopes. Because the store does not sell food and only has a sales nexus in Michigan, they do not need to apply line-level sales taxes on their invoices, since they only have one tax rate to worry about. Therefore, putting a 6% sales tax at the document level is sufficient to ensure that the store collects the right amount of taxes from their customers.
Our next example sales document is from a store that sells a wide variety of goods. A customer enters the store and purchases a package of socks, some laundry detergent, and a bag of apples. Because all of these items are placed on the same sales document, this store’s software needs to be capable of applying line-level taxes, since the apples are not taxed, but the other two items are.
Our final example sales document is from a jewelry store. They have multiple brick-and-mortar locations in Michigan, and they have a warehouse in Illinois. Additionally, they have a thriving website where they do a lot of business. A customer located in Illinois purchases a necklace from the jewelry store’s website. The actual necklace that the customer purchased is located in Michigan and must be shipped to the customer in Illinois.
Even though the jewelry store does not have an actual store in Illinois, because they have a nexus in Illinois via the warehouse, they must charge this customer the Illinois sales tax. And since handling charges are taxable in Michigan (as are shipping charges, unless you’re using a third party such as FedEx or UPS), the jewelry store needs to be able to apply line-level taxes to the invoice for this purchase.
There is a workaround, of course, if your business needs to be able to apply line-level taxes but your current Operational ERP system doesn’t support it. You could just add the taxes to your sales document as a separate line item, but this requires that you take a close look at the document and calculate the necessary taxes yourself. This doesn’t sound like much fun to us, though, and it of course opens the door for human error.
Told you it wasn’t scary
So there you have it. Line-level taxes are simply a method of ensuring that your company charges the correct amount of sales tax on a document, no matter how many factors are involved.
Taxes shouldn’t hold you up when you’re filling out your sales orders — the right Operational ERP software will, with a little setup on your end, do the heavy lifting for you when it comes to creating and taxing sales orders. By assigning the appropriate tax rates to the different items and customers within your software solution before they’re ever added to a sales document, you can rest easy knowing that your sales documents will be taxed correctly every time. No calculators or panicky cold sweats necessary.
P.S. If you use Microsoft Dynamics GP or QuickBooks Online as your accounting platform, SalesPad is ready and willing to be your tax assistant as you fill out your sales orders (and we can help with way more than sales taxes, too).