How Location Based Tax Works in R12 E-Business Tax (EBTax) - Includes sample setup [ID

1133994.1]

Modified 14-MAR-2011 Type HOWTO Status PUBLISHED
In this Document
Goal
Solution
1. How Location Based Taxes Work
a. What is a location based tax
b. How are Sales Tax and Use Tax Different?
c. How Does E-Business Tax Determine That a Location Based Tax Should Be Applied and find the Rate?
2. Setup Required For A Simple Example
a) Create a Tax Regime & Associate to the Operating Unit
b) Create the Tax and Link to the Geography Type
c) Create the Tax Status for each Tax
d) Setup (or verify) TCA Geography Hierarchy and Validation
ii) County Code
iii) City Code
iv) Ensure Validations Are Set
v) Run Geography Name Referencing Program for HR_Locations_ALL and HZ Locations
e) Define Tax Jurisdictions
f) Define Tax Rates
g) Set Default Tax Rules and Enable Tax
h) Test
3) Troubleshooting

Applies to:
Oracle E-Business Tax - Version: 12.0.0 and later [Release: 12.0 and later ]
Oracle Receivables - Version: 12.0.0 and later [Release: 12.0 and later]
Information in this document applies to any platform.
Goal
E-Business Tax (EBTax) Information Center > Regime to Rate Setup >Note 1133994.1
This note provides an overview of how Location Based taxes work in Release 12 E-Business Tax. For
the purposes of this note the scenario has been greatly simplified and we are focused only on the items
critical for location based taxes to derive a tax on a transaction.
Solution
1. How Location Based Taxes Work
a. What is a location based tax
A location based tax is a tax that is applied based upon the "Place of Supply". In most cases the place of
supply represents the location where the goods were received/consumed or services were provided.

For Example: Purchasing a widget in San Jose, California at a cost of $100, results in the additional
assessment of state, county and city taxes that apply to that location. In this case we might be assessed
a State tax rate of 8.25% and a City tax rate of 0.5%. (These are not real rates. Also in this example the
county does not levy a sales tax)
b. How are Sales Tax and Use Tax Different?
Sales tax is levied by the seller and is typically (though not always) required to be collected by parties
with a physical presence in the taxing geography (State, Country, etc).

Use tax is a self-assessed tax that is levied by the buyer. In most locations with a sales tax, the taxing
authority requires that the buyer self-assess whenever they purchase goods that are subject to tax and
where the seller did not charge and collect the tax on the purchase. For more on Self-Assessing Use
tax, refer to Note 948414.1 How to Configure a Tax for Automatic Self-Assessment in R12 E-Business
Tax and Payables
c. How Does E-Business Tax Determine That a Location Based Tax Should Be Applied and
find the Rate?
For the sake of this example we will ignore advanced tax rule creation. If you have complex scenarios
you should review the "Tax Rules" section of Note 1117544.1 E-Business Tax Information Center.

There are 6 elements that must exist in order for a location based tax to be applied.
1. The Tax Regime must be associated with the Operating Unit where the transaction is
being created (Via the party tax profile)
2. A Tax must exist within the regime with a geography specified (say State) and must be
"available for transactions".
3. TCA Geography Hierarchy must contain the geography (ex: California must exist as a
state in TCA)
4. A Tax Jurisdiction for the Geography on the transaction must have been defined (again -
California in our example)
5. A Tax Rate must be defined and set as the "Default" rate.
6. The Place of Supply rule must be defined to point to the proper address from the
transaction (In this example let's say "Ship To, Use bill to if Ship To is not found"
When a transaction is created, the system will apply the tax as follows:
1. Find the Operating Unit on the transaction and identify the regime that is associated
2. Find the Tax or Taxes (Ex: State) and Status
3. Find the place of supply geography (ex: State = Caifornia) identified for the tax (on the
rules page)
4. Check to see if the place of supply Geography has a Jurisdiction defined under the Tax
5. If no jurisdiction exists the tax will not be applied
6. If a jurisdiction exists then the tax engine will look to see if a tax rate exists for this
jurisdiction with the "Default" checkbox checked. If it does this tax rate will be applied.
(Ex: Tax rate for california of 8.25%)
7. If a jurisdiction exists but no tax rate exists with the jurisdiction, the system will search for
a tax rate without a jurisdiction (null jurisdiction). If one is found and the "default tax rate"
checkbox is checked then the corresponding tax rate will be used.
8. If a jurisdiction exists but no tax rate exists with a jurisdiction and no "Null" jurisdiction tax
rate exists then an error will be generated.
2. Setup Required For A Simple Example
a) Create a Tax Regime & Associate to the Operating Unit
Responsibility: Tax Managers
Navigation: Tax Configuration > Tax Regimes > Create

Be sure that you select "Allow Multiple Jurisdictions" so that you can define jurisdictions for each city,
county and state.



b) Create the Tax and Link to the Geography Type
Use the regime to rate icons on the regime created above to "Create a Tax". For this United States
example we will create three taxes (State, County and City)

State Tax: Note that the Geography Type is "State"


This screenshot shows the checkbox "Make tax available for Transactions" as checked. This step is
performed after all tax rules have been set. Normally is not visible when creating a tax.

County Tax: Again note that the parent geography type must be Country (not State)


City Tax: Again note that the parent geography type must be Country (not County)

c) Create the Tax Status for each Tax
Each tax must have at least one tax status. In most cases for the US a single tax status is sufficient. The
screenshot below shows a tax status for State. Not shown are the setups for City/County which are
created in a similar fashion.

d) Setup (or verify) TCA Geography Hierarchy and Validation
i) State Code
Responsibility: Trading Community Manager
Navigation: Administration > Geography Hierarchy
Query the Country Code "US" and select view details

ii) County Code

iii) City Code

iv) Ensure Validations Are Set
Since location based taxes require that a link be defined between the geography name on the transaction
and the jurisdiction, it is critical that tax validation be enabled. This forces users entering customers and
transactions to enter addresses that ave validated against the TCA structure.




v) Run Geography Name Referencing Program for HR_Locations_ALL and HZ Locations
Again, because the location based taxes require a relationship between geography and jurisdiciton, it is
important that each unique location be valid. The relationships are validated through the "Geography
Name Referencing Program". This program must be run for ALL new geography elements you create.
Make certain you run this for both HR_LOCATIONS_ALL and HZ_LOCATIONS. (HR Locations are the
Operating Unit, Legal Entity and Warehouse addresses while HZ Locations represent Customer and
Vendor addresses).

Common Error: System cannot determine geographical information for this location and cannot derive a
tax jurisdiction when entering an transaction

If an address is not valid and an invoice is entered, the following error will be generated: System cannot
determine geographical information for this location and cannot derive a tax jurisdiction when entering an
transaction

Note 438718.1 discusses steps to debug and resolve the issues with the address in question.
e) Define Tax Jurisdictions
Tax Jurisdictions must exist for the geography you specified on your tax. If a Jurisdiction is not defined
then the tax will never be derived via Location Based Taxes.
Tip: If you want to see a tax line for all three tax types in all cases, even when no tax exists, create the
jurisdiction but do not define a jurisdiction based tax rate. Then create a tax rate for the tax with a null
jurisdiction and a zero percent rate. This zero rate will be used for cases where no tax is levied and a
zero dollar tax line will be generated.

State Note that at least one jurisdiction must be set as default for each tax


County



City

f) Define Tax Rates
Create Tax Rates for each Jurisdiction where a rate exists plus create a tax rate with a null jurisdiciton
and a zero rate for each tax. This second zero rate tax ensures that errors are not generated for any
jurisdictions that might exist without a rate.

State: Be sure to set as default



County: Note that the jurisdiction is null. As discussed above a similar no-jurisdiction rate is suggested
for each tax.


City: Be sure to set as default



Note: In some cases a tax zone may be required to assess a specific rate for a set of zip codes within a
city. To setup a tax rule using a tax zone, refer to Note 1124208.1 How To Setup and Troubleshoot Tax
Zones and User Defined Geography Tax Rules in R12 E-Business Tax

g) Set Default Tax Rules and Enable Tax
Once the above steps are completed, make certain that you have default tax rules defined. For this
example the tax is set as always applicable and the place of supply rule is set as shown below.



Also Return to each tax and check the checkbox to "Make available for transactions"
h) Test
In this example we are showing how the results will work in Receivables. This setup will also work in AP.

Notice in this first screenshot that the address segments match those from the earlier setup


Next we enter an invoice line and as shown below the taxes automatically calculate using only the tax
setup we created above (and no special tax rules)

3) Troubleshooting

Some helpful resources to troubleshoot the setup discussed above include:
Note 1117544.1 EBTax Information Center
Note 577996.1 Case Study: Setup R12 E-Business Tax for Canada: Includes 2010 HST Changes
Note 1082172.1 Overview and Basic Troubleshooting of Tax That Does Not Calculate in R12 E-
Business Tax (EBTAX)