There is an effect on the price based on the sales tax rule. Whether the price includes or excludes the sales tax can be defined as follows:
- Price includes sales tax: For a 10% sales tax and a 1,000 USD price, the system will allocate 1,000 USD to the vendor or customer summary account and 90.91 USD to the sales tax account. The following diagram illustrates the calculation and posting entries for tax receivable and tax payable:
- Price excludes sales tax: For a 10% sales tax and a 1,000 USD price, the system will allocate 1,100 USD to the vendor/customer summary account and 100 USD to the sales tax account. The following diagram illustrates the calculation and posting entries for tax receivable and tax payable:
- Navigate to General ledger | Ledger setup | General ledger parameters, and then go to the Sales tax tab. Check the Amounts include sales tax checkbox.
- The vendor master data form can be accessed by navigating to the Accounts payable | Vendors | All vendors | Invoice and delivery fast tab. Check the Price included sales tax checkbox.
- The customer master data form can be accessed by navigating to the Accounts receivable | Customers | All customers | Invoice and deliver fast tab. Check the Price included sales tax checkbox.
- On transaction journals for example General ledger | Journal entries | General journal, then move under the Setup tab and check the Price included sales tax checkbox.
- On the sales order and purchase order headers, in the Setup fast tab, check the Price included sales tax checkbox.
There is a parameter that controls the sales tax posting for vendor invoices, allowing you to either add the tax amount to the expense account or to post the sales tax to a separate ledger account. This is under Apply sales tax taxation rules; you can find it under Tax | Setup | Parameters | General ledger parameters | Sales tax, as shown in the following screenshot:
In the following section, we will walk you through the two different options of Apply sales tax taxation rules:
- Apply sales tax taxation rules (Yes): If the controller requires you to add a sales tax amount to an expense account, this means there is no posting to a sales tax receivable account. It is disabled from the ledger posting groups form; this is illustrated in the Ledger posting groups form under Tax | Setup | Sales tax | Ledger posting groups, as shown in the following screenshot:
The following diagram illustrates that the financial entries in case of Apply sales tax taxation rules is set to Yes. The effect is on the tax receivable side, where the sales tax amount is added to the expense account. On the other hand, there is no effect on the tax payable side:
- Apply sales tax taxation rules (No): If the controller requires the sales tax amount to be posted to a separate account for tax receivable transactions, this means that the tax receivable will be available in Ledger posting groups. This is illustrated in the Ledger posting groups form under Tax | Setup | Sales tax | Ledger posting groups, as shown in the following screenshot:
The following diagram illustrates the financial entries if Apply sales tax taxation rules is set to No. The effect is on the tax receivable side, where the sales tax amount is posted to the sales tax account. On the other hand, there is no effect on the tax payable side:
Sales tax calculations may be affected if there is a cash discount involved in the transaction. Microsoft Dynamics 365 for Finance and Operations has parameters to control sales tax calculations when it comes to a cash discount, whether sales tax is calculated before or after the cash discount. To access Tax options, go to Tax | Setup | Parameters | General ledger parameters and go to Sales tax. Then, go to the Tax options fast tab, as shown in the following screenshot:
