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Magento Taxes Guide: How to Configure Tax Rules and Get Them Applied to Orders

Selling merchandise through online stores has the same tax obligations as through brick-and-mortar shop. Magento maintains multiple options that allow to set up a complex system of taxation and help web merchants meet tax requirements for definite locale, product or customer.

When configuring Magento tax rules one should consider settings to be accomplished and their sequence, since tax calculations depends on numerous aspects and conditions.

What Is Magento Tax Rule and How Does It Work?

Tax rule can be defined as a set of conditions on the basis of which tax amount is calculated. A rule includes a combination of product tax class, customer tax class, tax zone and rate. Each of your customers refers to certain customer group. Magento customer groups, in their turn, have tax class assigned. When outlining product details, you should tie product to suitable product tax class. Magento inspects customer shopping cart and imposes tax cost depending on the class, customer belongs to, product tax class and zone (country, state/province - determined by customer address)

It means, a tax rule is the last element in the chain and can be created when above mentioned “components” are configured.

1) Magento Product Tax Class

Product tax class is a kind of grouping instrument with the help of which system decides what tax rate will be applied to this or that listing.

Product tax class is being created under Sales->Tax->Product Tax Class. Here you can see default and previously created classes.

To create new group, you are supposed to click on “Add New” button on the toolbar and input its name.

Having created the class, you should assign it to respective product in Prices tab when creating or updating it.

2) Customer Tax Class

Customer tax class functions in the same way, product class does. You need to differentiate buyers somehow and set various rates for them.

If required tax class has not been created for shoppers yet, hover over Sales->Tax->Customer Tax Class and add the tax group, that will be used to create tax rule.

Once the class is configured, you are expected to assign it to respective customer group in Customer->Customer Groups section

3) Tax Zones and Rate

Geographical location is another factor, influencing Magento tax calculation and you should proceed with zone settings. When speaking about zone, one can mean entire country or region, state, province within a country.

To designate regional tax specifications switch to Sales->Tax->Manage Tax Zones&Rates and commence on tax rate creation hitting “Add New Tax Rate” button in the upper right corner.

Specify the following details:

  • Tax Identifier - provide tax name in this field, using no spaces (if several words are used, detach them by hyphen or underscore). Sometimes there might occur the necessity to configure multiple Magento tax rates for the same zone. Operate with identifiers to differentiate the rates.
  • Country - select from drop-down the country to associate tax rate to
  • State - the rate, you are going to create, can be applied to specific state/province within the country, you have just chosen (one, having various taxes throughout state/province). Whenever state does not matter, leave asterisk in this field
  • Zip/Post is Range - to make tax rate applicable to specific range of post codes, set this field to Yes. There will appear two extra drop-downs, where you can set range values. You can restrict the rate to one specific code or apply it to all the codes leaving asterisk (*) here
  • Rate Percent- finally input rate value for the tax rate to be created

4) Tax Rule

Once tax rule constituents or, as we have mentioned above elements, are prepared, it’s time to configure the rule itself. It is being respectively done under Sales->Tax->Manage Tax Rules.

Press “Add New Tax Rule” button in the upper right corner and fill in the following details:

  • Name - input title for the tax rule
  • Customer tax class - figure out what exactly customers, taxes will be calculated for, selecting one or more customer tax class
  • Product tax class - indicate what products should be added to the cart for taxes to be imposed selecting corresponding product tax class or classes
  • Tax rate - associate customer and product tax classes with definite tax rate or rates, selecting one (ones) from the drop-down. It means, if a customer from indicated customer tax class selects the item, that falls under indicated in the rule product tax class and customer address matches with ones, designated in zone settings, the tax rate will be applied to order total

Accomplish rule creation setting up priority and sort order for it.

How Is the Tax Rule Applied?

We have created test tax rule, according to which buyers that belong to Retail Customer tax class and reside in France (region does not matter) will pay extra 15% when ordering merchandise that are linked Jewellery Products tax class.

We have the test user (assigned the customer to Retail Customer tax class) and placed order with gold bracelet item (Jewellery Products tax class). The customer is from France, so just created tax rule is applied to order total.

Extra Settings Influencing Tax Calculation

When configuring Magento taxes, you must keep in mind system settings, which may change the way tax is computed. Tax related details can be adjusted under System->Configuration->Sales->Tax. There are various tabs, having expanded which you will access corresponding settings. We are going to draw your attention to Calculation Settings.

  • Tax Calculation Method Based On - this field offers you three options in the drop-down, namely total, row price or unit price. If you want tax to be based on total order sum, notwithstanding how many products it contains, select total from the drop-down. Unit Price selection means that tax will be calculated separately for each product. Row Total selection turns, respectively, tax applying to every row in the cart.

  • Tax Calculation Based On - indicate what address will influence tax rule computing - billing or shipping
  • Catalog Prices - the field includes two options, namely Excluding Tax and Including Tax. If you select Excluding Tax option, price will be displayed without taxes and tax amount will be added depending on the rules. Contrariwise, Including Tax means that product cost you specify already encloses tax
  • Apply Customer Tax - indicate whether tax will be applied before or after discount
  • Apply Tax On - specify whether tax should be calculated from the original or custom product price

Create necessary customer and product tax classes, configure zone peculiarities, create appropriate tax rules and combine different conditions in the rules to make tax calculation flexible and accurate. Resort to this tutorial to configure Magento tax rules and get them properly applied to the orders.

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