Calculation
Real-time tax calculation allows you to instantly add the correct tax to each transaction.
Last updated
Real-time tax calculation allows you to instantly add the correct tax to each transaction.
Last updated
Overview
Sphere has built it's own AI-enabled tax engine that is able to instantly calculate the right tax to apply at the point of transaction (e.g. invoices, checkout).
There are two key things that our engine needs to calculate tax correctly:
The product being sold and whether its attributes are taxable in the region its being sold into; this is know as the Tax Determination
The address of the customer; which not only impacts taxability but the Rate that must be used
We've provided more details on both these concepts below as well as how we integrate our tax engine into the billing flows of our customers.
In order to accurately assess whether your product is taxable in a region we need to understand the various attributes of your products that could impact its taxability.
When you onboard onto Sphere we pull in all your products from your billing systems and ask you to assign a Product Tax Code to each.
To assign a Product Tax Code, we ask a series of questions which capture the key taxability charateristics of your product. At the end of the questions, a Product Tax Code is suggested.
Sphere has created a taxonomy of Product Tax Codes for each key region globally. We then map this taxonomy to the tax law in that region and how that region would tax the various attributes that are contained in a particular Product Tax Code.
Traditionally, tax software vendors have done this mapping process manually which leads to errors and the mapping going stale as legislation changes. At Sphere, we've indexed the indirect tax legislation of every key economic region to not only map our taxonomy but to monitor the legislation for ongoing changes. This means global coverage for our customers that is always kept up to date to ensure you are always in compliance.
Note that our in-house tax experts always review and verify the mappings that our AI system produces to ensure that outputs are accurate.
Below are a number of best practices that we advise companies to adhere to when assigning Product Tax Codes:
Ensure ALL of your products have Product Tax Codes - our Monitoring and Calculation features both require Product Tax Codes to be assigned to all products. With respect to Monitoring, if Product Tax Codes are missing (even for historical products that are no longer in use), the transactions associated with those products won't be counted in your nexus analysis. With respect to Calculation, if a product being sold doesn't have a Product Tax Code, we won't be able to calculate tax on the transaction and an error will be return in your billing flow.
Avoid creating one-off products - we often see businesses creating individual products for every invoice they send out / every different customer. This causes issues as you have to assign tax codes to every single product you create which can be tedious and lead to errors. Every major billing system usually has a way to setup products so that you can reuse them in subsequent invoices (e.g. Stripe has a Product Catalog that allows you to standardize your product classes and avoid creating one-off products). This means you just need to setup your product tax codes once!
Never bundle your products - we also see businesses bundling services with a software / tangible product, or bundling a B2C and B2B offering. This causes big issues with tax authorities as these different offerings have very different tax determinations, meaning you will over / underpay tax. You need to split these products out in your billing system so that seperate tax codes can be applied to each
If unsure, ask your Sphere rep - we've dealt with tax determinations for many different types of products and can provide you with information on request so that you can make the right choice.
Once we know whether your product is taxable in the region you are selling it in, we then need to determine the rate to assign.
Rates change in every region and in some instances change at the rooftop level (especially in the US!).
Sphere uses advanced scraping technology to collate and monitor rates across tax authority websites, information bulletins and third party sources around the world. This means we have the world's broadest, best maintained global rate database that we offer to our customers.
To ensure we are pulling the correct rate for each transaction, we need to be able to accurately assign a taxable region to each transaction. However, quality of location data can be variable and so we have a priority ranking mechanism to assign the correct taxable region.
We've included a simplified priority ranking mechanism below (although this changes based on billing system used):
Shipping Address of Transaction
Shipping Address of Customer (there is often a customer profile / object within billing systems)
Billing Address of Transaction
Billing Address of Customer
Card Issue Country
Ultimately, tax authorities want to know where the services / goods are being used, hence shipping address is always seen as the gold standard in allocating the taxable region.
In some intances, tax is not collected on transactions due to the nature of the recipient. There are two main examples of this which Sphere caters to.
When selling internationally, many countries allow B2B software vendors to apply what is called the reverse charge mechanism, where a non-resident vendor can push the tax obligation onto the customer IF the following conditions are met:
The customer provides a valid VAT / GST ID
The invoice provided to the customer notes that the reverse charge mechanism is being applied as well as including the validated ID number
Sphere has connected to tax ID verifications APIs from each region around the world to help you validate VAT IDs in two ways:
Automatically: we can extract VAT IDs directly from billing systems and return whether the ID was successfully validated or not (if it was then tax will not be applied to the transaction, if not tax will be applied).
Manually: In the Customers section of the Sphere app, click on any customer, scroll down to the Tax ID table, click 'Add Tax ID' and then enter the region and the Tax ID number. A validation / error message will be returned.
In the US, customers may hold tax exemption certificates for a variety of different reasons (they may be resellers or in an exempt industry category). This means that these customers are exempt from sales tax.
Sphere offers Exemption Certificate Management in the Customers section of the Sphere app. If a customer sends you their certificate, click on the relevant customer in the Customers section, scroll down to the Tax ID table and upload the tax exemption certificate. You can also select the date for which the certificate is valid and Sphere will send you an email to remind you to request a new certificate from your customer when it expires.
