Issue/Symptom/Question

Sales and Use Tax Guide

Applies To

PENTA for Windows

Reference Manual

Resolution/Fix/Answer

PENTA’s sales and use tax function eliminates the time-consuming task of calculating taxes manually. Its primary purpose is to provide a central source for you to efficiently build and maintain tax rates and jurisdictions. You have the flexibility to set up and customize tax information to suit your environment. Once you enter this information, PENTA automatically uses it to calculate taxes and presents the results in a variety of formats—on screen and in reports.

The sales and use tax function is not contained in a single module. You will notice its effects throughout PENTA, most significantly in the Accounts Payable, Financial and Accounting, Job Management, and Inventory modules.

PENTA’s sales and use tax function:

• Enables you more accurately to calculate tax liabilities.

• Saves you the time required to identify information on invoices and billings to customers.

• Provides data on windows and reports that improves information available for sales tax audits.

• Provides considerable flexibility for tracking tax within projects.

• Automatically creates open payables for tax liabilities.

• Provides sales and use tax reports that detail taxable and exempt transactions, in addition to associated tax amounts by jurisdiction.

The Sales and Use Tax Guide contains procedures for setting up and applying sales and use tax in PENTA. This Guide is for experienced PENTA users who need instructions for using the sales and use tax feature.

How to Use Sales & Use Tax

1. Create Costcode Tax Rules

Costcode Tax Rule Maintenance Window Notes

For each job and Cost Type, you can define a set of Job Cost Code tax rules. While you could enter each set separately, it is much faster to use a master template and apply it to multiple Jobs. In the previous Setup section, you created a master template for Costcode tax rules from which you can quickly build other sets of rules.

Use the Costcode Tax Rule Maintenance window to maintain a link between a set of Job/Cost Types and Costcodes—those to which you are charging committed cost and those to which you are charging the tax. This enables you to separate the tax portion of Job costs.

Purchase Orders and accounts payable invoicing use the defined tax rules to apply the tax to job costs. The rule may define such things as:

• Taxable or tax exempt.

• Taxable percent.

• Tax jurisdictions, where applicable.

• The Costcode where the expense will apply.

Guidelines for entering/changing information:

• PENTA validates the length and type of information in a Costcode field.

• PENTA does not validate the information you enter in a Costcode field if it contains the wildcard character (i.e., an underscore).

• Enter rules from the most specific to the most general.

• PENTA tries to match in sequence order (low to high). PENTA first selects those that match without the use of a wildcard.

A. Define a set of job Costcode tax rules for each job and Cost Type

Project Management > Jobs > Costcode Tax Rule Maintenance

1. Use Job Id to enter the unique code you entered on the Master tab to identify this job.

2. Use Cost Type Code to identify a type of costs within your Costcodes such as labor, materials, and subcontract work.

3. If you want to copy a template, click the Copy Tax Rules button
   PENTA launches the Copy Costcode Tax Rule Template pop-up window.

4. Enter the Id of the Tax Template you want to copy from.

5. Enter the Id of the Job or Cost Type you want to copy from.

6. Click the Copy Tax Rules button.

7. Use Seq # to identify the point in the sequence at which PENTA should apply taxes for the Costcode(s). Each sequence number contains information for the application of tax, percentage taxable, distribution of the tax amount to another Cost Type/Costcode.

8. Use Costcode to associate costs on your job.
   You can enter Costcode masks in this field to include a range of Costcodes. The only valid wildcard character is an underscore (_).
   PENTA displays the description of the Costcode giving up the tax liability. PENTA displays this only if a wildcard does not exist and if the Costcode is for a job or a standard Costcode.
   PENTA displays the description of the Costcode to which you are assigning the tax liability. This displays only if a wildcard does not exist and if the Costcode is for a job or a standard Costcode.

9. Optionally use Tax Exempt Reason Code to enter the reason why a transaction is exempt.

10. Use Taxable Percentage to enter the percentage of the taxable activity.

11. Optionally use Apply Tax to Job to transfer the tax liability from one job to another.

12. Optionally use Apply Tax to CT to transfer the tax liability from one Cost Type to another.

13. Optionally use Apply Tax to Costcode to transfer the tax liability from one Costcode to another.

14. Define a Costcode or range of Costcodes using a wildcard character. The only valid wildcard character is an underscore (_).

15. Use Direct Pay Tax to indicate whether PENTA always accrues the tax liability, and you are responsible for paying the tax authority directly. The default is from the job.

16. Optionally use the Tax Jurisdiction List pop-up window to view the tax jurisdiction values.
    These are either the defaults or the overrides for the current Costcode. For more information about the tax jurisdiction window, refer to the Tax Jurisdiction Window section.

B. Optionally enter a tax certificate for the current Costcode

Use the Tax Certificate pop-up window to enter a tax certificate for the current Costcode.

Project Management > Jobs > Costcode Tax Rule Maintenance > Tax Cert button

1. Enter a tax certificate for the current Costcode.

2. Close the window to commit your changes.

You can now create a transaction with a job distribution. PENTA will apply the tax liability to the appropriate Costcode.

2. Establish PO Tax Information

After completing this Step, you have created a list of associated taxing authorities that apply to the purchase of goods or services.

Purchase Order Information Window Notes

PENTA maintains the tax jurisdiction lists at the purchase order line item level. The tax jurisdiction list used/displayed is the one in effect for the ultimate destination point (warehouse or purchase order line item override).

To be consistent with the non-inventory line items, PENTA inserts a tax line to centralize the taxes. PENTA applies applicable tax distributions associated with jurisdictions to the warehouse’s Tax Accrual Account.

If the purchase order’s line item is for:

• Delivery to a warehouse, PENTA calculates the tax liability using the tax jurisdiction overrides or the defaults of the warehouse that were in effect as of the invoice date. You can override the information; however, PENTA does not apply the changes to the warehouse tax jurisdiction list, the changes are overrides.

• Direct shipment, the entire purchase order is tax exempt because the purchased items are strictly for resale. PENTA applies any taxes through the sales order.

A. Enter the Purchase Order’s taxable information.

Purchasing > Purchase Orders > Master tab

1. Identify the Purchase Order whose taxable information you want to define.
   Either query an existing Purchase Order or create a new one.

2. Optionally use the Taxable (Y/N) field to override the tax status of all line items—for inventory and non-inventory purchase orders. Available values are:

• Blank – For non-inventory purchase orders, the tax status of each distribution level determines what is taxable and what is tax exempt. For inventory purchase orders, PENTA uses the warehouse and product tax status to determine the tax status of each line item.

• Y – The whole purchase order is taxable. For each line item, PENTA uses the applicable tax jurisdictions and rates to calculate the taxes.

• N – The whole purchase order is tax exempt. PENTA considers all lines items taxable. If you enter this, click the Tax Info button.

1. In the Tax Information pop-up window, use Tax Exempt Reason Cd to indicate why. PENTA then displays the following values:

• Total PO Tax Amount – The sum of all tax lines.

• Line # – The tax line (first line identified on the Parameter window).

• Description –The tax line’s description.

• Amount – The tax amount.

B. Enter non-Inventory distribution information.

Purchasing > Purchase Orders > Non-Inventory Distr tab

1. If System Option 152 (Tracking Sales & Use Tax) is set to Y, optionally change the Tax Exempt Reason Cd and Tax Certificate Id field values.
   This lets you update the amount of tax to be committed and displays PENTA’s estimated tax impact.
   If you enter a value in the Tax Exempt Reason Code field, the purchase order line changes to non-taxable. For a complete description of this window, refer to the Tax Jurisdiction Window information in the Setup section.

2. To review, update, or override the purchase order line item tax jurisdiction list, open the Taxes pop-up window’s Tax Jurisdictions pop-up window.

C. Enter Inventory distribution information.

For inventory purchase orders, PENTA uses the warehouse tax jurisdiction list. From the Inventory tab, you cannot view the tax authorities affected by the current line; you must go to the warehouse to view or modify the tax jurisdiction list.

1. If you want to record an inventory distribution, enter the required fields on this tab.

2. Review the amount of tax to be committed, the tax-exempt reason code, and tax certificate.

3. Enter optional fields as needed.

4. Close the window to commit your changes.

3. Modify Invoice Tax Information

Invoice and Credit Memo Entry window

On taxable accounts payable invoices, the tax is considered:

• Sales tax if the vendor is registered in the jurisdiction(s) associated with the invoice. All taxes associated with invoices on this job are paid to the vendor.

• Use tax if the job to which the invoice is charged is set up as a direct-pay job, or the vendor is not registered. All taxes associated with invoices on this job accrue for payment directly to the jurisdiction, not the vendor.

PENTA calculates the tax on each line item on the invoice, applying the appropriate tax jurisdictions and tax types to each item. The resulting tax amount, however, may vary from the tax amount stated by the vendor on the invoice.

If the difference between the invoice tax amount and the vendor tax amount is:

• Greater than the System Option 154 tax variance amount, PENTA uses its calculated taxes. The payment check to the vendor states, “Tax calculation discrepancy, Adjusted Amount Paid.”

• Less than the System Option 154 variance amount, PENTA uses the vendor’s tax amount.

Tax Exempt Status Notes

• At the document level – If you enter the tax exempt reason code at the document level the entire invoice is tax exempt and you cannot make specific distributions taxable or non-taxable.

• At a distribution level – If you do not enter a tax exempt reason code at the document level, you can enter a tax exempt reason code at the individual distribution levels. See below for an explanation of how PENTA handles the tax exempt status for each type of distribution.

On the Distribution tabs (the individual distribution levels) PENTA does not indicate whether a tax exempt reason code exists at the document level. If you attempt to set the tax exempt reason code on the Distribution tabs, a message warns you if the code exists at the document level.

If you enter a tax exempt reason code for the:

• Purchase order, PENTA selects the tax status from the purchase order line item.

• Subcontract, the tax status is Exempt. You cannot enter a tax exempt reason code for a distribution to a subcontract. PENTA assumes subcontracts are tax exempt.

• Job, PENTA determines the tax status by looking at the distribution’s Costcode:

• If this code is linked in the Costcode Tax Rule Maintenance window, PENTA takes the tax status from here.

• If PENTA does not find a match, it uses the tax status from the Job Information window.

• OU and a general ledger account, the tax status is based on the status assigned to the OU and the general ledger account. If either is marked exempt, the transaction is exempt.

• Fixed asset, the tax status is based on the status assigned to the expense category to which the invoice is charged and the tax status of the OU that the fixed asset is assigned to. If either is marked as exempt, the transaction is exempt.

Tax Exempt Window Notes

Invoices from a vendor require the reporting of taxes or tax exemption. PENTA makes these reporting’s by purchase order line item, based on the purchase master or order detail, as well as invoices that are not purchase order-related. You may need to override the taxability of an individual line number. From within the Tax Exempt pop-up window you may create and modify the tax jurisdiction list. You can also override the tax jurisdictions currently in effect for an invoice payment or purchase order line number.

You can make the invoice tax exempt, regardless of the tax status of the individual distributions.

• Use (Tax) Exempt Reason Cd to identify why an accounts payable or detail distribution is exempt from tax. When you enter a code, a description appears next to it.

• Use Tax Exempt Cert(imitate) to enter an Id that certifies a distribution is tax-exempt. PENTA does not validate this entry.
  Tax List Overridden indicates whether the entity’s default list (N) or an override list (Y) determines the taxes.

Tax Jurisdiction Notes

• At the document level – If you enter tax jurisdictions manually at the document level, these jurisdictions take precedence. PENTA ignores subsequent jurisdictions entered at the distribution levels within the document.

• At the distribution level – If you do not set tax jurisdictions at the document level, PENTA uses jurisdictions that you manually enter at distribution levels. Jurisdictions entered in the Invoice and Credit Memo Entry window override tax jurisdictions you set for the different types of distributions (for example, tax jurisdictions assigned to a job when it was set up).See below for an explanation of how PENTA handles the tax jurisdictions for each type of distribution. The tax jurisdiction list for the:

• Purchase Order is based on your manual override. You can enter a Purchase Order’s line item list and the ship-to address in the Purchase Order Information window.

• Subcontract is not based on the lists. PENTA assumes subcontracts are tax exempt.

• Job is based on your manual override. The Costcode on the distribution in the Costcode Tax Rule Maintenance window:

• If PENTA does not find a match, it uses the jurisdiction list entered here.

• If there is not a match, PENTA uses the tax jurisdiction list associated with the job.

• The job’s address (postal code and ZIP).

• The job OU’s address.

• System Option 154 determines if the job or job’s OU address is used.

• OU and GL account is based on your manual override.

• Fixed asset is based on your manual override.

Default Tax Jurisdiction Notes

The following describes how PENTA determines the default tax jurisdictions for an entity/distribution level. If the job address has:

• A state code and postal code, then PENTA looks for a sales tax jurisdiction that matches the state and postal code. Jurisdictions that match are part of the default list.

• A state code, then PENTA looks for a sales tax jurisdiction that matches the state code. Jurisdictions that match are part of the default list.
  If all the jurisdictions are set up with state codes and postal codes, but the job only has a state code, PENTA will not find any jurisdictions.
  If some of the jurisdictions have state and postal codes and some only have state codes and the job only has state codes, PENTA uses the jurisdictions that have only state codes and ignores those with state and postal codes.

Manual Payment Window Notes

The Manual Payment window compares the amount of tax paid to the vendor with the PENTA-calculated sales tax on a manual check.

Though you can change tax jurisdictions or modify the tax amount, PENTA does not accrue sales and use tax for manual payments.

The Manual Payment window uses the same rules as the Invoice and Credit Memo Entry window. For additional details, see the Tax Exempt Distributions information, located in Accounts Payable’s Invoice and Credit Memo Entry Window Description.

If tax is paid:

If the two values are different, PENTA displays a message. You can do one of the following:

• Override the tax jurisdiction list. If you override the tax jurisdiction list, you can adjust the rates, define the exact amounts per jurisdiction, or add and subtract jurisdictions until the tax equals the PENTA calculated sales tax. Your overrides can be at the document or the distribution level.

• Modify the tax amount on the Document tab to equal the PENTA calculated sales tax. If you modify the tax amount, the check amount is equal to the sales tax plus the distribution amount.

Note: Modifying the tax amount misrepresents the amount of sales tax that is paid. You should work out the correct payment with the vendor.

If tax is not paid:

If no tax is paid, PENTA treats the document (or all distributions in the document) as tax exempt. No use tax is calculated.

If the vendor does not collect tax, but you owe it to a taxing authority, you must create a manual accounts payable invoice for each tax jurisdiction. These manual tax payments are not included in any PENTA tax liability reports.

A. Define Costcode tax rules

If you are entering or changing invoice information for a job, you should complete the Create Costcode Tax Rules instructions—as the Costcode tax rules affect how PENTA calculates taxes for the job. Refer to the Tax Exempt Status and Tax Jurisdiction information.

Information Entry and Processing > Accounts Payable > Invoices and Payments > Invoicing and Credit Memo Entry
OR
Accounts Payable > Check Processing > Manual Payment Entry

1. Query the appropriate batch.

2. Enter your invoice distributions.

3. Decide whether you want to set the tax status for the document or distribution.

• For the document, go to Step 3.A.5.

• For each distribution level, go to Step 3.A.6.

4. Open the Document tab’s Tax Exempt pop-up window.
   If the document should be:

• Tax exempt, enter the tax exempt reason code and tax certificate (optional).

• Taxable, open the Tax Jurisdictions pop-up window and verify or update the tax jurisdiction list. This list will override the jurisdictions at the distribution levels.

• Then go to Step 3.A.8.

5. To set the tax status of the:

• Purchase Order, open the Purchase Order Distribution tab.

• Job, open the Job Distribution tab.

• OU/account, open the Account Distribution tab.

• Fixed asset, open the Equipment Distribution tab.

6. Open the Tax Exemption pop-up window.
   If the distribution should be:

• Tax exempt, enter the tax exempt reason code and tax certificate (optional).

• Taxable, open the Tax Jurisdiction pop-up window and verify or update the tax jurisdiction list.

7. Repeat the previous steps for each distribution level.

8. Exit the window.
   PENTA distributes the batch. The tax liabilities created are either paid directly to the vendor or accrued for later payment to the associated tax jurisdiction.

4. Apply Payment Against the Tax Liability

Cash Receipt Entry Window Notes

The Cash Receipt Entry window enables you to enter the payments you receive from customers and distribute the amount to the appropriate jobs, line items, work orders, and accounts.

A. Complete the tax information

Note: You cannot change the tax jurisdictions, tax rates, or override tax on the Cash Receipt Entry window.

Billing & Accounts Receivable > Cash Receipts > Cash Receipt Entry > Open Receivables tab

1. Use Action to indicate whether the receivables are:

• A(vailable)

• G(ross)

• N(et)

• P(artial)

The Tax field displays the amount(s) are tax (not taxable, but actual tax). A Y indicates the line is the tax line. The Invoice field displays the number assigned to the invoice.

2. Use the Payment Amount to enter the amount paid.
   You can only enter a value in this field if the value in the Action field is P.
   Open Amount displays the amount that remains unpaid.
   Original Amount displays the original amount of the invoice.

3. Click the toolbar’s Close Window button.
   PENTA distributes the receipt and applies cash and the associated tax liability based on the amount.

5. Change Jurisdictions on Sales Orders

Sales Order Entry Window Notes

The Shipping Address & Tax Info pop-up window displays one of the following:

• Customer address, if you did not enter a Job Id on the sales order.

• Job address, if you entered a Job Id on the sales order.

• Override address, if you changed the address from one of two above.

The word “default” or “override” appears at the top of the window. You can change the address regardless of whether the current address is a default or an override.

Within The Shipping Address & Tax Info pop-up window, the following options are available:

• Reset Default Address – Clicking this button returns all values to the default address.

• Tax Jurisdiction List – Use this secondary pop-up window to view or override a tax jurisdiction list. This window is only available if you did not invoice the order.

• Name – Customer or job* name.

• Address – Customer or job* address.

• City – Customer or job* city.

• State/Prov – Customer or job* state/province.

• Postal Cd – Customer or job* postal code.

• Country – Customer or job* country.

• Tax Exempt Reason – The reason why a transaction is exempt. The description of the code appears next to it.

• Tax Certificate – Customer or job* tax certificate ID.

• Jurisdiction List – PENTA displays this list only if the invoice is still open.
  “DEFAULT” indicates the tax jurisdiction list for the ship-to address is in use. “OVERRIDE” indicates PENTA overrode the tax jurisdiction list.

• Tax Amount –Displays the Tax rate applied to tax line items.

• Full Order Amount – Displays the sale price of the order and the associated tax liability.

*PENTA displays the job address if you entered a job Id on the sales order.

Sales Tax

For sales orders, PENTA only calculates sales tax. The ship-to address in the Shipping Address & Tax Info pop-up window affects sales order tax jurisdictions.

Drop-Ship/Direct Shipment Processing Notes

When you are creating a sales order for drop-shipment, you create drop-ship line items. Releasing the sales order creates a tax exempt purchase order. When you process accounts payable for the purchase order, PENTA creates an accounts receivable invoice for the sales order.

PENTA deems any purchase order created for resale to a customer tax exempt. The purchase order master and detail lines will have:

• A taxable indicator of N.

• A tax exempt reason code of NA (not applicable).

• A tax certificate/permit of direct ship.

Sales Tax Credit Notes

PENTA issues Sales tax credits only for the credit amount given to the customer, not for the original purchase price.

Example: A $1000 item purchased at 5% sales tax ($50). The item is returned with a 20% restocking fee. The customer’s net liability (20%) for the original sale is $200 for the item and $10 sales tax. The customer receives an $800 credit for the returned item and a $40 tax credit.

A. Review and/or edit tax exempt information

Inventory > Sales Orders > Sales Order Entry

1. Query an existing or enter a new sales order.

2. Change the address (changes the tax jurisdictions used).

3. View and modify the Tax Exempt Reason Code and the Tax Certificate Code fields.

4. Create a unique Tax Jurisdiction List.

5. View the Amount of Tax and the Full Order Amount.

6. Click the toolbar’s Close Window button.
   Your shipment of material for this sales order creates the appropriate tax liability amount on the customer invoice and within PENTA. If is paid sales tax on the original purchase order for the warehouse, a sales tax credit also accrues.

6. Set the Tax Status of a Product

Product Information Window Notes

In the Product Information window, you can set the taxable status of products you have in your warehouse.

When you create invoices that include the product and the product is marked as:

• Taxable – The appropriate taxes/tax jurisdictions are applied, or

• Non-taxable – PENTA applies no taxes unless you enter overrides in the tax jurisdiction window of the Invoice and Credit Memo Entry window.

A. Set a product’s tax status

Inventory > Setup > Product Information

For each product:

1. Query the desired product.

2. Use the “Taxable Product (Y/N)” field to set the taxable status.

3. Close the window to commit your changes.

7. Transfer Goods

Inventory Transfer Window Notes

A warehouse is a vehicle to sell products. When you transfer material to a job, PENTA does not create a customer billing for the material. Penta Technologies recommends that you create a sales order to bill the customer for the material, then ship the material to the customer or the job address.

How tax is determined and accrued

Based on the product master, a specific product may be taxable or tax exempt. If the product is taxable, the point of transaction depends on the location.

The following table identifies the various interactions due to the sale of a product.

• FROM – the source selling the product (for example, a warehouse).

• TO – the product’s buyer (for example, a sales order).

For example, a product transferred from a warehouse to a job/OU account/fixed asset is considered part of the job/OU account/fixed asset and the tax is considered use tax.

A product allocated to a sales order or transferred to a warehouse is a sale and the tax is sales tax.

Debits

When you transfer products using the Inventory Transfer window, PENTA applies tax debits against the following:

• Costcode – At the Costcode level, the tax liability may reside at the Costcode that incurred the expense or it might shift to another Costcode. In either case, a Cost Type links uniquely to an account number and use tax accrues.
  The Job Type’s cost of sales account is credited or debited based on the following hierarchy:

1. Costcode rule template.

2. Job/Cost Type/Costcode account to which the material is being transferred.

• Fixed Asset/Expense Category – Use tax accrues in the asset expense category expense cross-reference account you entered in the Asset Class Information window.

• OU/Account – Use tax accrues in the general ledger account you assign in the Inventory Transfer window.

• Warehouse – Sales tax accrues in the tax accrual account you entered in the Warehouse Information window.
  The tax amount in the tax accrual account does not change if you make changes to the unit price, tax jurisdictions, or tax status after you enter the receipt or once you start accounts payable invoice processing.

Credits

For warehouses, PENTA accrues sales tax. For all others, PENTA accrues use tax. In addition, if the general ledger account is an accounts payable account, an open payable results for the appropriate tax jurisdiction(s).

A. Transfer materials

Inventory > Warehouse Transactions > Inventory Transfer

1. Enter a new batch (by entering the date) or query an existing batch.

2. To set defaults to the Transfer Detail tab for the:

• FROM location(s): Open the Batch Entry tab’s Default FROM Location pop-up window and enter the default information.

• TO location(s): Open the Batch Entry tab’s Default TO Location pop-up window and enter the default information.

3. In the Transfer Detail tab, enter all the products you want to transfer.

4. Click the toolbar’s Close Window button.
   PENTA submits the Batch for processing.

Setup Process