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Allocation methods and examples

Determination allocates taxes when the accrual method's set to Accrue Total Tax (applies to overcharges and undercharges) or Accrue Variance (applies to undercharges only).
The available allocation methods include:
  • Tax rate-based
     - The default allocation method. It is always used for Canada. This method calculates the variance then distributes it based on the tax rate for each jurisdiction.
    For example, the configured accrual method for undercharge is Accrue Variance. The vendor charged tax is $90.00 and the Determination calculated tax is $100.00. The variance is $10.00, which is allocated amongst the state, county and city taxing jurisdictions. The tax rate for the state is 5%, the county is 3% and the city is 2%. The taxes allocated include $5.00 to the state, $3.00 to the county and $2.00 to the city.
  • Top-down
     - Applies to U.S. states and territories only. This method calculates the tax to pay then distributes it in the following order until the funds are used:
    1. State
    2. County
    3. City
    4. District
    For example, the vendor charged tax is $4.00 and the Determination calculated tax is $10.00. The variance is $6.00. The tax to pay each jurisdiction, the amounts allocated to each jurisdiction, and the funds left to allocate are as follows:
    Jurisdiction
    Tax to pay
    Amount allocated
    Funds left to allocate
    State
    $5.00
    $5.00
    $0.00
    County
    $3.00
    $1.00
    $2.00
    City
    $2.00
    $0.00
    $2.00
    District
    $0.00
    $0.00
    $0.00
  • Bottom-up
     - Applies to U.S. states and territories only. This method calculates the tax to pay then distributes it in the following order until the funds are used.
    • District
    • City
    • County
    • State
    For example, the vendor charged tax is $4.00 and the Determination calculated tax is $10.00. The variance is $6.00. The amounts to pay each jurisdiction, the amounts allocated to each jurisdiction, and the funds left to allocate are as follows:
    Jurisdiction
    Tax to pay
    Amount allocated
    Funds left to allocate
    District
    $0.00
    $0.00
    $0.00
    City
    $2.00
    $2.00
    $0.00
    County
    $3.00
    $3.00
    $0.00
    State
    $5.00
    $1.00
    $4.00
Example 1 - Tax rate-based allocated (vendor undercharged tax)
Example 1 details
Item
Amount
Invoice gross amount
$1000
Vendor charged tax
$65
DCT amount
$82.50
Variance
$17.50
State tax rate
6.25%
County tax rate
1%
City tax rate
1%
District tax rate
0%
The following formula's used to calculate the tax to pay to a jurisdiction:
Jurisdiction tax rate x Invoice gross amount = Tax to pay to a jurisdiction
The following table shows the calculation and as the tax to pay to each jurisdiction:
Taxing jurisdiction
Calculation
Tax to pay
State
6.25% x $1,000.00
$62.50
County
1.00% x $1,000.00
$10.00
City
1.00% x $1,000.00
$10.00
District
0.00% x $1,000
$0.00
The tax to pay to each jurisdiction's totaled ($82.50). Notice that the total amount's the same as the DCT amount ($82.50).The total amount ($82.50) is used to calculate the accrued amount distributed to each taxing jurisdiction. The formula is:
Tax to pay to jurisdiction / Total tax amount x Variance = Accrued amount distributed to each jurisdiction
The following table shows the calculation and the accrued amounts distributed to each jurisdiction:
Taxing jurisdiction
Calculation
Accrued amount distributed
State
$62.50 / $82.50 x $17.50
$13.26
County
$10.00 / $82.50 x $17.50
$2.12
City
$10.00 / $82.50 x $17.50
$2.12
District
$0.00 / $82.50 x $17.50
$0.00
The total accrued amount distributed to each taxing jurisdiction is $17.50, which matches the variance ($17.50).
Example 2 - Top-down allocation (vendor undercharged tax)
Example 2 details
Item
Amount
Invoice gross amount
$10,000
Vendor charged tax
$135
DCT amount
$1000
Variance
$865
State tax rate
6.25%
County sales tax rate
1.75%
County transportation authority tax rate
1%
City tax rate
1%
District tax rate
0%
This table includes the tax to pay, the accrued amount distributed and the funds left to allocate to each jurisdiction when the top-down allocation method is applied. The total tax to pay is $1,000.00 and the variance is $865.00.
Jurisdiction
Tax to pay
Accrued amount distributed
Funds left to allocate
State
$625.00
$625.00
$240.00
County (sales tax)
$175.00
$175.00
$65.00
County (transportation authority sales tax)
$100.00
$65.00
$0.00
City
$100.00
$0.00
$0.00
District
$0.00
$0.00
$0.00
The state's allocated the full tax amount ($625.00). This leaves $240.00 in funds.
The county level includes 2 types of sales tax. In Determination, each taxing authority's assigned an internal ID, which isn't visible to you. The internal ID defines the order of evaluation when there are multiple tax jurisdictions at the same level. Specifically, the internal ID with the lower number takes precedence regardless of whether the top-down or bottom-up allocation method is used. In this example, the county (sales tax) takes precedence over the county (transportation authority sales tax). $175.00 is allocated to the county (sales tax), which leaves $65.00 in funds.
Even though the tax to pay to the county (transportation authority sales tax) is $100.00, only $65.00 in funds remain. $65.00 is allocated to the county (transportation authority sales tax). The city is allocated $0.00 because no funds are left.
Example 3 - Bottom-up allocation (vendor undercharged tax)
Example 3 details
Item
Amount
Invoice gross amount
$10,000
Vendor charged tax
$135
DCT amount
$1000
Variance
$865
State tax rate
6.25%
County sales tax rate
1.75%
County transportation authority tax rate
1%
City tax rate
1%
District tax rate
0%
This table includes the tax to pay, the accrued amount distributed and the funds left to allocate to each jurisdiction when the bottom-up allocation method is applied. The total tax to pay is $1,000.00 and the variance is $865.00.
Jurisdiction
Tax to pay
Accrued amount distributed
Funds left to allocate
District
$0.00
$0.00
$865.00
City
$100.00
$100.00
$765.00
County (sales tax)
$175.00
$175.00
$590.00
County (transportation authority sales tax)
$100.00
$100.00
$490.00
State
$625.00
$490.00
$0.00
Since there are no district taxes, there are $865.00 in funds left to allocate to the city, county (sales tax), county (transportation authority sales tax), and state. The city is allocated the full tax amount ($100.00). This leaves $765.00 in funds.
The county level includes 2 types of sales tax. In Determination, each taxing authority is assigned an internal ID, which isn't visible to you. The internal ID defines the order of evaluation when there are multiple tax jurisdictions at the same level. Specifically, the internal ID with the lower number takes precedence regardless of whether the bottom-up or top-down allocation method is used. In this example, the county (sales tax) takes precedence over the county (transportation authority sales tax). $175.00 is allocated to the County (sales tax). This leaves $590.00 in funds. The county (transportation authority sales tax) is allocated $100.00, which leaves $490.00 in funds.
Even though the tax to pay to the state is $625.00, only $490.00 in funds remain. $490.00 is allocated to the state.

This article applies to:

  • Product: ONESOURCE Determination, ONESOURCE Indirect Tax