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Tax Calculation for Credit and Debit Memos

Zuora

Tax Calculation for Credit and Debit Memos

The Invoice Settlement feature is generally available as of Zuora Billing Release 296 (March 2021). This feature includes Unapplied Payments, Credit and Debit Memo, and Invoice Item Settlement. If you want to have access to the feature, see Invoice Settlement Enablement and Checklist Guide for more information.

Zuora provides the ability to automate tax calculation for credit and debit memos under certain conditions. This article introduces the two tax modes of memo items and the conditions under which tax calculation for memos is either supported or unsupported.

Two tax modes of memo items

When you create memos from invoices through the Zuora UI or Zuora REST API, you can specify whether to include tax in the credit or debit amount for each memo item. It will determine the tax mode of the memo item, either tax inclusive or tax exclusive

If you create memos from invoices through the Zuora UI, you can use the Tax-Included column to switch the tax mode of memo items from tax exclusive mode to tax inclusive mode. The default mode is tax exclusive, meaning that the credit or debit amount does not include tax. 

If you create memos from invoices through the Zuora REST API, you can use thetaxMode field of the Create credit memo from invoice or Create debit memo from invoice operation in the request body to specify the tax mode of memo items. The default value isTaxExclusive, meaning that the value of theamount field does not include tax. 

Scenarios of using tax inclusive mode when creating memos

Scenario 1: Credit amount exceeds the acceptable range 

You want to give full credit to your customer from an invoice in tax inclusive mode. The following tables show the automatic calculation by tax engine. When you create the credit memo, the memo item is by default in tax exclusive mode and the credit amount is a system populated value of $20.33. According to the calculation, the invoice tax amount and the memo tax amount have a $0.01 difference due to the rounding. Now the credit amount (with tax) is $25.01, whereas the available to credit amount is $25. Because the system does not allow credit amount to exceed the available to credit amount, you are blocked from creating this credit memo.

Invoice (tax inclusive)
Invoice amount (with tax) Tax rate Invoice tax amount Invoice tax amount (rounded) Invoice amount (without tax) Invoice amount (without tax) (rounded)
25 0.23 4.67 4.67 20.3252 20.33
Credit Memo (tax exclusive)
Credit amount (without tax) Tax rate Memo tax amount Memo tax amount (rounded) Credit amount (with tax) Credit amount (with tax) (rounded)
20.33 0.23 4.6759 4.68 25.0059 25.01

Billing rule setting: Round net amount (default)

Calculations for invoice:

  • Invoice amount (without tax) = 25/(1+0.23) = 20.3252
  • Invoice amount (without tax) (rounded) = 20.33
  • Invoice tax amount = 25-20.33 = 4.67

Calculations for credit memo:

  • Credit amount (with tax) = 20.33*(1+0.23) = 25.0059
  • Credit amount (with tax) (rounded) = 25.01
  • Memo tax amount = 25.01-20.33 = 4.68

After switching the tax mode of this memo item to tax inclusive, you can enter a $25 credit amount (with tax) to give your customer full credit and no tax discrepancy occurs.

Invoice (tax inclusive)
Invoice amount (with tax) Tax rate Invoice tax amount Invoice tax amount (rounded) Invoice amount (without tax) Invoice amount (without tax) (rounded)
25 0.23 4.67 4.67 20.3252 20.33
Credit Memo (tax inclusive)
Credit Amount (with tax) Tax rate Memo tax amount Memo tax amount (rounded) Credit amount (without tax) Credit amount (without tax) (rounded)
25 0.23 4.67 4.67 20.3252 20.33

Scenario 2: Maintain standard credit amount across different tax rates 

You want to give a standard $10 partial credit amount (with tax) to two customers in different states with different tax rates. Both invoices are in tax exclusive mode. The following tables show the automatic calculation by tax engine. When you create the credit memos, the memo items are by default in tax exclusive mode. According to the calculation, when you enter $10 as a credit amount for both memo items, the credit amounts (with tax) are higher than $10 and different, all because of tax calculation. 

  Invoice (tax exclusive)
  Invoice amount (without tax) Tax rate Invoice tax amount Invoice amount (with tax)
Customer 1 in State 1 100 0.2 20 120
Customer 2 in State 2 100 0.1 10 110
  Credit Memo (tax exclusive)
  Credit amount (without tax) Tax rate Memo tax amount Credit amount (with tax)
Customer 1 in State 1 10 0.2 2 12
Customer 2 in State 2 10 0.1 1 11

Calculations for credit memo:

  • Customer 1 in state 1: Credit amount (with tax) = 10*(1+0.2) = 12
  • Customer 2 in state 2: Credit amount (with tax) = 10*(1+0.1) = 11

After switching the tax mode of these memo items to tax inclusive, you can maintain a standard $10 credit amount (with tax) across customers in different states with different tax rates.  

  Invoice (tax exclusive)
  Invoice amount (without tax) Tax rate Invoice tax amount Invoice amount (without tax)
Customer 1 in State 1 100 0.2 20 120
Customer 2 in State 2 100 0.1 10 110
  Credit Memo (tax inclusive)
  Credit amount (with tax) Tax rate Memo tax amount Credit amount (without tax)
Customer 1 in State 1 10 0.2 1.67 8.33
Customer 2 in State 2 10 0.1 0.91 9.09

Calculations for credit memo:

  • Customer 1 in state 1: Credit amount (without tax) = 10/(1+0.2) = 8.33
  • Customer 2 in state 2: Credit amount (with tax) = 10/(1+0.1) = 9.09

Tax calculation when creating memos

The following tables show the supported (Yes) and unsupported (No) conditions of tax calculation when creating credit and debit memos.

Credit and debit memos that are generated from invoices:

Tax Engine Invoice in Tax Inclusive Mode Invoice in Tax Exclusive Mode
Zuora Tax

Yes

Note: Memo tax is calculated based on the default tax exclusive mode by default. There might be differences between invoice tax amount and memo tax amount because of the rounding. If this happens, try switching to the tax inclusive mode to calculate memo tax.  

Yes 

Note: Support the Percentage tax type only. We do not support the Flat Fee type.

Avalara Yes
Connect Yes

Credit and debit memos that are generated from product rate plan charges:

Tax Engine Invoice in Tax Inclusive Mode Invoice in Tax Exclusive Mode
Zuora Tax

Yes 

Note: Support the Percentage tax type only. We do not support the Flat Fee type.

Yes 

Note: Support the Percentage tax type only. We do not support the Flat Fee type.

Avalara Yes Yes
Connect Yes Yes

Credit memos that are generated from other ways, such as bill run or REST API:

Tax Engine Invoice in Tax Inclusive Mode Invoice in Tax Exclusive Mode
Zuora Tax

Yes

Note: Support the Percentage tax type only. We do not support the Flat Fee type.

Yes 

Note: Support the Percentage tax type only. We do not support the Flat Fee type.

Avalara Yes Yes
Connect
  • Bill Run: No
  • Other ways via REST API (Except generating memos from invoices and product rate plan charges): Yes
  • Bill Run: No
  • Other ways via REST API (Except generating memos from invoices and product rate plan charges): Yes

Taxation items creation through REST APIs

You can create taxation items for credit and debit memos through Create taxation items for credit memo and Create taxation items for debit memo operations with the following conditions. The taxation items will be appended to the draft memos.

Scenario Invoice in Tax Inclusive Mode Invoice in Tax Exclusive Mode
Memos that are generated from invoices

No

Yes

Note: If the invoice tax is calculated by the tax engines that are configured in Zuora, you are not allowed to append tax to the memo.

Memos that are generated from product rate plan charges

No

Yes

Memos that are generated from other ways, such as bill run

No

Yes

Tax recalculation when updating memos

When you update the amount of a memo item, the memo tax will be recalculated under the following conditions:

  • The memo is created from a product rate plan charge and you use Avalara to calculate the tax.
  • The memo is created from an invoice and you use Avalara or Zuora Tax to calculate the tax.

The memo tax recalculation will not be triggered due to memos cannot be updated under the following conditions:

  • The memo is created from an invoice and the invoice is in tax inclusive mode.
  • The memo is created from a product rate plan charge and the invoice is in tax inclusive mode.
  • The memo is created in other ways, such as bill run or REST API.