What is Tax Classification in SAP SD?

Tax Classification in SAP SD: There are different kinds of taxes that are relevant for SD. The fundamental tax classification type that SD consultants need to worry about is Sales Tax. There might also be further variations in Sales tax like VAT, state sales tax etc.

The basic premise for taxation is at the material and customer level. Certain materials might be tax-exempt. Certain customers might be tax-exempt (eg. resellers). Certain customers/materials might be partially taxable or with low-tax rates.

The tax category of the customer and material are set respectively in the customer/material master.

Tax Classification in SAP

Tax categories in Customer master

The typical examples of tax classification are as 0- tax-exempt, 1- liable to taxes, etc

The tax classification as computed in pricing (tax condition types with classification D or E)

Tax Categories in Material master

For a sales order in most of the cases, the tax calculations as done in the pricing procedure for condition types with classification-tax (eg , MWST , UTXJ,XR1..etc) is based on first determining the tax classification of the customer/material and the country codes of the customer and the delivering plant.

1), The customer’s tax classification is trickled down to the sales document in the following order.

2), Payer (if different from sold-to)

3), Ship-to (if maintained)

4), Sold-to (if not maintained in ship-to)

5), The material tax classification is straight forward.

6), Tax classifications are also maintained at Country/Region (state) level.

For example UTXJ tax condition type is based on the above combination of customer/material/country/region tax classifications.

Also See: Extended Withholding Tax : How to Customizing