In the Tax Codes window, you define the tax names, or tax codes, you use on invoices to record invoice taxes you pay to suppliers and tax authorities. Each tax code has a tax type, a tax rate, and an account to which you charge tax amounts.

You can define tax codes that have different tax rates during an effective date range you specify. For example, you can define a tax code that has a 10% rate one year, and a 10.5% rate the next year. Payables automatically uses the correct rate depending on the invoice date.

You define the Tax Code Defaults hierarchy in the Payables Options window to determine the order in which Payables searches for a tax value (tax code or tax group) when a Payables document requires a default tax value. You can assign tax codes to expense or asset accounts so that Payables will automatically enter the appropriate tax code when you enter an
account. If you use automatic tax calculation, Payables calculates the invoice sales tax and automatically creates tax distributions. You do not need to define special tax codes for distributions that include tax. Simply select the Includes Tax check box when you enter the distribution, and Payables adjusts the calculation.

During the Payables Invoice Validation process, Payables uses the tax code to validate that you have entered tax distributions correctly. After you define tax codes, you can group them into tax groups in the Tax Groups window. You can then enter a tax group in the Tax Code field for Payables and Purchasing transactions to calculate multiple taxes on a single taxable item.

Offset Tax Codes
Offset taxes are negative–rate taxes. In the Tax Codes window you can associate Offset taxes with Sales or User–defined taxes. When you use the Sales or User–defined tax on an invoice, you record the tax, but the associated Offset tax reduces or eliminates your tax liability.

To associate an Offset tax with a Sales or User–defined tax, first define the Offset tax. Then when you define the Sales or User–defined tax, enter the Offset tax code in the Offset Tax field.

Withholding Tax Codes
Withholding Tax type tax codes can have multiple rates, effective date ranges, tax amount limits, and taxable amount limits. You can also link a tax authority supplier to a Withholding Tax type tax code so you can create invoices to pay taxes you withheld from your suppliers.