Understanding Taxes and how the Hostgator China Tax Engine works

A tax is a financial levy or charge imposed by the local, state or federal government of the taxpayer. There are two types of tax:

  1. Direct Tax: which are paid directly to the government by the taxpayer such as Income Tax, Corporate Tax, etc..

  2. Indirect Tax: which is paid through one or more intermediaries to the government. Examples of Indirect Tax include Sales Tax, Value Added Tax (VAT), Service Tax, etc..

The Hostgator China Tax Engine module allows you to collect any Indirect Taxes from your Customers and Sub-Resellers, when you sell any product or service to them using our system.

Understanding How the Tax Engine Works

  1. The Tax Engine can handle only Variable taxes as a percentage of the Invoice Amount. Any Fixed amount Tax needs to be raised as a Miscellaneous Invoice separately.

  2. Tax is stored against only Invoices.

    Note

    Tax is calculated on the amount of the Invoice.

    Example:

    If say you have configured 10% Tax on Domain Registration, then when an Order for a 10 year Registration term of USD 5 per year is added, then 10% Tax is calculated on the Invoice amount of USD 50 (USD 5 x 10 years). So the Tax amount will be 10% of USD 50 ie. USD 5. The Invoice raised would be of USD 55 and would display the following upon clicking the same:

    Invoice Subtotal: USD 50
    Tax: USD 5
    Invoice Amount: USD 55

  3. A Tax Rule consists of

    • Name of the Tax (eg. Sales Tax, VAT, etc.)

    • Product Category for which the tax is applicable

    • Country and State combination to which the rule applies

    • Percentage of the Invoice amount for calculating the tax

    • Any information that you wish to display to your Sub-Resellers and Customers when an Invoice is generated under this tax rule

    • Start and End Date of this Tax Rule alongwith the applicable Time Zone

    • Exempted Sub-Reseller and Customer Ids

  4. The system does not allow you to create conflicting tax rules and separate tax rules need to be created for each Product/Service that you are selling for each unique State and Country combination within a set timeframe. This means that if you are selling 2 products A and B, then you may create rules such as -

    Product Category Percentage of Invoice Amount Name of Tax Country State Time Zone Begin Date End Date
    A 10 Sales Tax Any Country Any State GMT 10-08-2006 10-10-2006
    A 15 Service Tax Any Country Any State GMT 11-10-2006 10-08-2007
    B 6.3 Sales Tax USA Arizona MST 10-08-2006 10-08-2007
    B 5 VAT China Beijing Beijing 10-08-2006 10-08-2007

    Let's analyze the above example,

    • For Product A two Tax Rules have been created which are applicable to all Countries. This is only possible since they do not have overlapping timeframes ie. the second tax rule is starting after the first tax rule has ended.

    • If more than 1 tax needs to be applied for a particular Product for a unique Country & State combination, then you would need to add all tax percentages and mention the same in a single Tax Rule under an appropriately named Tax, so that your Sub-Resellers and Customers can identify which tax they are paying.

  5. If you modify an existing tax rule for a Product/Service, then the system deactivates the previous tax rule and creates a fresh one for the same, with the modifications submitted.

    This implies that if say you modify the Percentage of Invoice Amount of an existing rule, it would not modify the same in the previously generated Invoices, and would only affect Invoices generated after this modification has completed. The same is applicable for any other Tax Rule parameter such as Invoice Footer.