Automating U.S. Sales & Use Tax Calculation with E...

Amanda_Zhong · ‎2019 Nov 15

What is External Sales & Use Tax Calculation in S/4HANA Cloud ?

SAP S/4HANA Cloud, public edition distinguishes between internal and external tax calculation methods for the United States. External Sales & Use Tax Calculation is handled through integration with external tax partners such as Avalara, Sovos, Thomson Reuters, Vertex, Wolters Kluwer, or other approved tax solution providers (listed alphabetically). For more information, refer to the documentation on External Sales & Use Tax Calculation.

The External Sales and Use Tax Calculation solution in SAP S/4HANA Cloud, Public Edition utilizes the U.S. tax procedure 0TXUSX. It includes a standard tax interface provided by SAP, enabling seamless integration with external tax systems. This integration facilitates the following operations:

Determination of tax jurisdictions for US addresses.
Calculation of applicable tax rates and amounts, along with necessary taxation details, during order, invoice, and journal entry processing in the Record-to-Report, Order-to-Cash, and Procure-to-Pay process cycles.
Maintaining of an auditable track record in the external tax system.
Verification of transactional tax details to ensure consistency between SAP S/4HANA Cloud and the external tax system.

Key Functional Components

The External Sales & Use Tax Calculation process in SAP S/4HANA Cloud, Public Edition, includes the following four main components:

1. External Tax Communication Scenario (SAP_COM_0177)

Establishes a secure connection between your SAP S/4HANA Cloud system and external tax partners, enabling the automation of tax determination and calculation. See details here.

2. Display External Tax Document (Fiori App: F4782):

Provides a centralized, user-friendly view of transactional sales and use tax data. Key functionalities include:

Accessing tax information on a state-by-state basis.
Drilling down into external tax documents to trace the business origin of tax liabilities.
Viewing detailed taxation data at the item level, including key details such as who, what, when, where, and how.
Analyzing a breakdown of taxation information at the jurisdiction level (e.g., state, county, city, district), including tax jurisdiction codes, tax amounts, tax base amounts, tax rates, tax sourcing, exemption details, among others.

More details can be found here.

3. Manage External Tax Postings (Fiori App: F3085):

Facilitates the monitoring and management of external tax calculation transactions, providing the following key functionalities:

Identify and resolve data inconsistencies between SAP S/4HANA Cloud and the external tax engine to ensure data accuracy.
Perform forced updates to the partner system to correct and maintain accurate tax posting records within it, supporting auditing requirements.

More details can be found here.

4. Extensibility

Cloud Business Add-Ins (Cloud BAdIs), defined by SAP and collaboratively implemented by partners and customers, offer extensibility options to support custom tax calculation requirements:

Add additional fields to enhance tax determination processes.
Utilize the Map Extensibility Fields (Fiori ID: F3899) to map your custom extensibility fields to the reserved fields in the external tax interface.
Customize tax determination and calculation logic to handle unique business scenarios and requirements.

For more information, see:

How It Works: Integration with Partners

To enable external tax calculation, start by assigning the country US to the tax calculation procedure 0TXUSX and ensuring all configurations are accurate. This setup is essential for connecting to your external tax partner system.

Detailed steps and additional information about the external tax solution can be found here. Additionally, you can use the Fiori app External Tax Configuration Check to verify your setup and ensure everything is correctly configured.

External Tax Configuration Check .png

How It Works in the Order-to-Cash Process

When external tax calculation is triggered during the sales process, the following steps occur:

The sales transaction calls the integration scenario SAP_COM_0177, generating a SOAP message that includes both header and item-level data.
The message is sent to the external tax partner’s Integration Flow (iFlow) on SAP Cloud Platform Integration, which processes and forwards the data to their tax engine for calculation based on the provided parameters.
The tax partner returns the calculated tax details—including amounts and rates—back to SAP, which applies them to the transaction.

Sales Tax Determination in Order-to-Cash Processes

Accurate tax determination for sales orders, invoices, and other sales and service documents is essential. It depends on various factors, including the who, what, when, where, and how of the transaction. Additional details on tax calculation parameters can be found here.

Tax Sourcing in External Tax Integration

To accurately track the jurisdiction code used for tax determination and calculation, a Tax Sourcing field was introduced in version 2008CE (Q3/2020). This field allows external tax partners to provide sourcing information and supports the following sourcing options:

Origin-Based: Tax is determined based on the ship-from jurisdiction code, which represents the jurisdiction from where the goods are shipped.
Destination-Based: Tax is determined based on the ship-to jurisdiction code, reflecting the jurisdiction where the goods are delivered.
Point of Order Acceptance-Based: Tax is determined by the jurisdiction code corresponding to the location where the seller formally accepts the customer’s order.
Point of Order Origination-Based: Tax is determined by the jurisdiction code of the location where the customer initiated or placed the order.

Jurisdiction Code Logic in Order-to-Cash Process

In SAP S/4HANA Cloud, public edition, jurisdiction codes are derived based on the following default rules:

The ship-from jurisdiction code and point-of-order acceptance jurisdiction code are sourced from the jurisdiction code of the shipping plant, which is determined when the plant address is maintained in the U.S.
The ship-to jurisdiction code and point-of-order origin jurisdiction code default to the jurisdiction code maintained for the ship-to customer.

To customize or modify these default rules, you can utilize the Change Fields BAdI (FOT_EXT_CALC_FIELDS_CHANGE). For detailed instructions, refer to:

How it works in Procure-to-Pay and Record-to-Report Process

In the Procure-to-Pay (P2P) process for purchase orders and invoices, as well as in the Journal Entry process when the "Calculate Tax" option is selected, tax is calculated at the line-item level using the following key elements by default:

FI tax calculation procedure 0TXUSX
Product Number: Material Number entered for the item
Ship-to jurisdiction: Defaulted from the plant, cost center, or other relevant sources.
Ship-from jurisdiction: Derived from the supplier’s master data.

Similar as Order-to-Cash Process, the SAP_COM_0177 scenario is triggered. This initiates a process to calculate the appropriate taxes and return the results to SAP. Similarly, customers can utilize extensibility functions to override the default tax determination logic, enabling customization as needed.

How Sales and Use Tax Liabilities are posted to Accounting Journal Entries

The way sales tax liabilities are posted to the accounting journal entries is based on customer-specific configurations. By default, SAP S/4HANA Cloud delivers default G/L accounts with a Layered Tax Liability Structure. This setup defines separate Sales and Use Tax Liability G/L accounts based on the level of jurisdiction (e.g., state, county, city, and others).

However, customers have the flexibility to create their own G/L account structure and determine account mappings as needed. The default structure and example provided here are for demonstration purposes only.

Sales Tax on Seller’s Books (O1)

P.S.: For external tax integration, it is recommended that customers maintain tax exemptions, including customer exemptions and material exemptions, exclusively in the tax partner system. Avoid using tax code O0 in the SAP S/4HANA system to prevent discrepancies with the external partner system.

Sales Tax on Buyer’s Books (I1)

Use Tax on Purchase (U1)