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Tax Selection for Calculation

Zuora

Tax Selection for Calculation

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Overview

Zuora offers the ability to select the tax rate for additional product purchases or refunds resulting from the updates on your subscriptions, such as upselling, early renewal, and cancellation.

With the Apply new tax rate for additional units purchased and old tax rate for returns? billing rule, you can select the tax rate being applied in the following scenarios:

  • Tax rates are changed within a billed period during the lifecycle of subscriptions.
  • Changes are made to active subscriptions by creating amendments or orders.
  • Taxability is changed to product rate plan charges (for example, from not taxable to taxable). (If you find this scenario fits your business needs, contact Zuora Global Support to enable this enhancement).

When this billing rule is set to Yes, and the tax rate or taxability is changed:

  • If you increase the price or quantity for the same product in the same billing period, the customer will be charged for the increased amount at the NEW tax rate.
  • If you decrease the price or quantity for the same product in the same billing period, the customer will be charged for the decreased amount at the OLD tax rate.

Supported operations 

This feature supports billing operations for one amendment or order before billing, such as updates in the product quantity, price, or the product rate plan charge taxability.

Use cases

Use case 1: Increase quantity when the new tax rate is effective in a billed period.

Imagine that you are a software-as-a-service provider that licenses the service for $10 per user per year. Here are the charge details of your product.

Charge name Charge model Unit price Billing period
Service fee Per unit $10 Annual

One customer purchased 10 units with an initial term of 12 months, starting on 1/1/2021. On that day, you created a bill run with a target date of 1/1/2021 for this customer. The tax rate was at 10%. The bill run generated the following invoice:

Charge name Service period Quantity Amount Tax rate Tax amount Subtotal
Service fee 1/1/2021-12/31/2021 10 100 10% 10 110
Total 110

On 7/1/2021, this customer increased the quantity from 10 to 11. You created a new bill run with a target date of 7/1/2021 to charge the customer for the additional unit. On that day, the tax rate applicable to your product has been changed to 11%. Depending on whether you enable the Tax Selection for Calculation feature, the tax amount on the invoice from the second bill run will be different.

If the feature is not enabled (default): The new tax rate is applied to all the purchased units, and the old tax rate is applied to the proration credit. In this case, the tax rate is 10% for the credit item, and the tax rate is 11% for the charge item.

Charge name Service period Quantity Amount Tax rate Tax amount Subtotal
Service fee-Proration credit 7/1/2021-12/31/2021 10 -50.41 10% -5.04 -55.45
Service fee - Proration 7/1/2021-12/31/2021 11 55.45 11% 6.10 61.55
Total 6.10

Calculation of Amount:

  • Service fee-Proration credit: 10 * 10 / 365 * 184 = 50.41(round)
  • Service fee-Proration: 11 * 10 / 365 * 184 = 55.45(round)

If the feature is enabled: The new tax rate is applied only to the additional units added. In this case, the tax rate is 11% for both the credit item and the charge item, meaning that only the one unit added is taxed at the new rate of 11%.  

Charge name Service period Quantity Amount Tax rate Tax amount Subtotal
Service fee-Proration credit 7/1/2021-12/31/2021 10 -50.41 11% -5.53 -55.96
Service fee - Proration 7/1/2021-12/31/2021 11 55.45 11% 6.10 61.55
Total 5.59

Use case 2: Decrease quantity when the new tax rate is effective in a billed period.

In the previous example, imagine that your customer decreased the quantity from 10 to 9. You created a new bill run with a target date of 7/1/2021 to refund the customer. On that day, the tax rate applicable to your product has been changed to 11%. Depending on whether you enable the Tax Selection for Calculation feature, the tax amount on the invoice from the second bill run will be different.

If the feature is not enabled (default): The tax rate is 10% for the credit item, and the tax rate is 11% for the charge item.

Charge name Service period Quantity Amount Tax rate Tax amount Subtotal
Service fee-Proration credit 7/1/2021-12/31/2021 10 -50.41 10% -5.04 -55.45
Service fee - Proration 7/1/2021-12/31/2021 9 45.37 11% 4.99 50.36
Total -5.09

Calculation of Amount:

  • Service fee-Proration credit: 10 * 10 / 365 * 184 = 50.41(round)
  • Service fee-Proration: 9 * 10 / 365 * 184 = 45.37(round)

If the feature is enabled: the old tax rate is applied to the removed units, meaning that the one unit removed is taxed at the old rate of 10%. 

Charge name Service period Quantity Amount Tax rate Tax amount Subtotal
Service fee – Proration credit 7/1/2021-12/31/2021 10 -50.41 10% -5.04 -55.45
Service fee - Proration 7/1/2021-12/31/2021 9 45.37 10% 4.54 49.91
Total -5.54

Use case 3: Increase quantity when the product has become taxable in a billed period.

Building on the previous example, imagine that when your customer purchased your product on 1/1/2021, the product was not subject to tax. The first invoice is like this:

Charge name Service period Quantity Amount Tax rate Tax amount Subtotal
Service fee 1/1/2021-12/31/2021 10 100 0 0 100
Total 100

When your customer decided to increase the quantity from 10 to 11 on 7/1/2021, the product has become taxable at 10% due to a tax rule change in the region.

If the feature is not enabled (default): the credit item is not taxed while the charge item is taxed at 10%.

Charge name Service period Quantity Amount Tax rate Tax amount Subtotal
Service fee-Proration credit 7/1/2021-12/31/2021 10 -50.41 0 0 -50.41
Service fee - Proration 7/1/2021-12/31/2021 11 55.45 10% 5.55 61
Total 10.59

If the feature is enabled: the new tax rate is applied to both the credit item and charge item, meaning that only the one additional unit is taxed at 10% due to the taxability change of your product.  

Charge name Service period Quantity Amount Tax rate Tax amount Subtotal
Service fee – Proration credit 7/1/2021-12/31/2021 10 -50.41 10% -5.04 -55.45
Service fee - Proration 7/1/2021-12/31/2021 11 55.45 10% 5.55 61
Total 5.55

Limitations 

This feature does not apply to the billing operations in any of the following scenarios:

  • Updating the billing period alignment or trigger condition in a subscription
  • Updating a subscription in more than one amendment or order action:
    • Updating a product and canceling the subscription
    • Updating a product and removing a product
    • Updating a product and changing the terms and conditions
    • Updating a product and suspending the subscription
    • Updating a product and changing the BCD
  • Setting the Invoice/Credit Memo generation rule billing rule to Put all negative charges on a credit memo
  • Setting the When service period of an invoice item crosses multiple tax rate periods, it will generate: billing rule to Multiple Tax Items.