Capture tax on term and custom discounts

Customers using a standard or custom tax solution in the Taxes application can capture taxes on term discounts in their Accounts Receivable and Order Entry transactions.

Customers using the Canadian Sales Tax solution can use term discounts and custom discounts in certain types of taxable transactions in Accounts Payable, Accounts Receivable, and Order Entry.

Subscription

Accounts Payable

Accounts Receivable

Taxes
Regional availability

All regions

User type

Business
Permissions

Accounts Payable

  • AP supplier invoices: List, View, Add, Edit, Post, Delete

  • Terms: List, View, Add, Edit, Delete

Accounts Receivable

  • AR sales invoices: List, View, Add, Edit, Post, Delete

  • Terms: List, View, Add, Edit, Delete

Term discounts

Requirements for applying term discounts and calculating taxes on those discounts can vary between regions. Now, you can set the calculation method for your Accounts Receivable and Order Entry terms to meet the requirements of your operating country.

You can create new terms or modify existing terms with a new calculation method for the discount.

Define term discounts

When you define a term in a company or entity, you can set the term discount to calculate on the line-item total excluding taxes or the AR sales invoice total including all charges. This selection determines how the taxes are calculated when the term is used in a transaction.

  • Line-items total, excluding taxes - This method applies the discount to the line item only, excluding any taxes for that item. The discount is not applied to other subtotal charges like shipping.

  • Line-items total, including taxes - This method applies the discount to the line total, including the item amount and the taxes on that amount. The discount is not applied to other subtotal charges like shipping.

  • Invoice total, including taxes and added charges - This method applies the discount to the invoice total, including all line items, taxes, shipping, and other charges. This method is the default selection.

The following table shows how taxes are calculated and tax records are generated for each discount calculation method.

Calculation method Discount Tax Tax records
Line-items total, excluding taxes Applied on line-item net amount No discount applied No adjusting tax record created
Line-items total, including taxes Applied on line-item gross amount Calculated on net amount after discount Adjusting tax record created
Invoice total, including taxes and added charges Applied on invoice total (net + tax + other charges) Calculated on net amount after discount Adjusting tax record created

Term discounts can be applied in the following transaction types:

  • Accounts Receivable: AR sales invoices, Recurring AR sales invoices

  • Order Entry: Transactions posting to Account Receivable

  1. Go to Accounts ReceivableSetup > More > Terms.

  2. Under Discount > Calculated based on, select the appropriate calculation method for the term discount.

When you create an Accounts Receivable or Order Entry transaction, you can select a pre-defined term under Payment terms. When you apply a payment to that transaction, you can select the Apply term discount checkbox.

Apply term discounts

When you create a transaction, you can select a term discount to apply to the transaction. To capture taxes on the base amount before the discount is applied, you must select a term discount that calculates based on the line-item total.

If you select a term discount that calculates on the AR sales invoice total, then the taxes are captured on the gross AR sales invoice amount.

In Accounts Payable transactions, the term discount is automatically calculated. In Accounts Receivable transactions, you must select the Apply term discount checkbox. Term discounts are only applied when the payment is made in full.

This is how the payment is applied for each term discount calculation method:

You post an AR sales invoice that has a line item with a base amount of £1000, and a tax detail rate of 20% for a tax amount of £200. You apply a term with a 10% discount for line-items total, excluding taxes.

When you apply the payment and select the Apply term discount checkbox, the discount is calculated on the line-item base amount excluding taxes. This results in a discount of £100. That discount is applied to the net amount before taxes. No adjusting tax record is created.

You post an AR sales invoice that has a line item with a base amount of £1000, and a tax detail rate of 20% for a tax amount of £200. You apply a term with a 10% discount for line-items total, including taxes.

When you apply the payment and select the Apply term discount checkbox, the discount is calculated on the line-item base amount and the tax amount. This results in a discount of £120. That discount is then distributed between the base amount and the tax amount. In this example, a discount of £100 is distributed to the base line, and £20 to the tax line. An adjusting tax record is created.

You post an AR sales invoice that has two line items. Line item 1 has a base amount of £1000, and a tax detail rate of 20% for a tax amount of £200. Line item 2 has a base amount of £50 and a tax exempt tax detail. You apply a term with a 10% discount for the AR sales invoice total, including taxes and added charges.

When you apply the payment and select the Apply term discount checkbox, the discount is calculated on the invoice total. This results in a discount of £125. That discount is then distributed between the line items and the tax amounts. In this example, a discount of £100 is distributed to the first line, £5 to the second line, and £20 to the tax line. An adjusting tax record is created.

Term discounts are only applied when the payment is made in full. You cannot apply a term discount to a transaction with a credit or partial payment.

To see the applied discount, you must run a General Ledger report or subledger report.

Custom discounts

Custom discounts let you enter a discount for AR sales invoices where no term discount was selected and override a term discount when it's no longer applicable. If you use the Canadian Sales Tax solution, you can use custom discounts in Accounts Receivable transactions for terms that calculate by line-item excluding taxes. This gives you the flexibility to manage complex term discount situations.

Limitations

  • You cannot change the calculation method for a term discount that's in use or that has been used in a transaction.

  • When you create an invoice with a term discount, you can only use a custom discount to override a term discount that calculates based on the line-item total, excluding taxes.

  • If you apply a custom discount to a partial payment, then you cannot use a term discount in that transaction.

  • If you make a partial payment and then pay off the invoice using a term discount, you cannot apply a custom discount.

  • To see the applied discount, run a General Ledger report or subledger report. You can also view it by selecting the payment link in the header of the paid invoice.

You cannot use term discounts for taxes in the following cases: 

  • Transactions using Cash-basis tax capture

  • Transactions with a negative balance on the line or invoice total (for example, credits and partial payments)

  • Terms with penalties