Accounting technology / Glossary / Tax determination engine

What is a tax determination engine?

Definition

A tax determination engine is software that works out the indirect tax on each transaction: whether it is taxable, at what rate, in which jurisdiction and under which rule. It decides from the product or service, the seller's and buyer's locations, the customer type and the date, and returns the result to the billing, checkout or ERP system.

Also calledtax enginetax calculation enginetax determination

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Inputs: Product, locations, customer, date
Output: Taxability, rate, jurisdiction
Category: Tax and compliance

How tax determination works

The engine holds content: rates and rules for thousands of jurisdictions, which product codes are taxable where, and how rules change over time. Each sale is sent to it through an API with the item, amount, addresses and customer details. It finds the jurisdictions involved, down to city or special district for US sales tax, applies product taxability and any exemption certificate on file, and returns the tax to charge with the reasoning. It also records the transaction for returns. The hardest part for most businesses is mapping their own products and services to the engine's tax codes once, accurately. Determination is the first step of indirect tax compliance; returns, registrations and e-invoicing follow from the data it records. Avalara and Fonoa provide engines across many countries; Anrok, Kintsugi, Zamp and Numeral focus on US sales tax for software and online sellers.

Common questions

Why can't a business just use a rate table?+

Because tax depends on more than location. Product taxability varies by jurisdiction, rates change, some customers are exempt, and in the US local districts overlap. Engines maintain all of this and apply it per transaction.

Where does a tax engine sit in the system landscape?+

Next to the systems that create sales: e-commerce checkout, billing and the ERP. They call the engine for each transaction and store its answer on the invoice.

What is product taxability mapping?+

Assigning each product or service to the engine's tax codes, which determine how it is treated in each jurisdiction. Errors here repeat on every sale, so mapping is reviewed when products change.