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Welcome back! In this video, we’re diving into taxes in NetSuite. While taxes might seem daunting—especially in the United States—once you understand the structure and terminology, you’ll see it’s relatively straightforward. Let’s break it down.
The first tax-related term to understand is the tax nexus. A nexus is simply a connection point between two entities, such as the intersection of multiple streets. For taxes, the nexus represents the connection between a tax-collecting body, like the IRS, and your business, which is responsible for paying the necessary tax.
At the top level, the tax nexus usually corresponds to a country. For example, in Canada, the nexus is the country itself. However, in the United States, because of the complexity and variety of tax codes, the nexus operates at the state level. For instance, California and Texas are separate tax nexuses.
From this point forward, I’ll use the United States as our example for two reasons: most companies use the U.S. dollar as their primary currency, and the U.S. tax system is one of the most complex. Understanding the U.S. system makes it easier to apply the concepts to other countries.
Let’s say your tax nexus is California. Beneath the tax nexus, you have a tax group. If you imagine a map of California divided into smaller sections, each section represents a tax group. These groups can correspond to counties, larger regions that include multiple counties, or smaller areas. For example, one tax group might be "Blue County" within California.
Next, within each tax group, you’ll encounter tax codes. Tax codes represent specific taxes applicable in a given area. If your business is in "Smallville," a town within Blue County, California, the tax nexus would be California, the tax group would be Blue County, and the tax codes might include the state tax, a Blue County tax, a Smallville city tax, and potentially additional taxes based on location-specific tax laws.
States like California may have a high number of individual tax codes, whereas other states might have fewer. It’s important to note that tax codes are not exclusive to one tax group. For instance, a state’s tax code applies to all groups within the tax nexus (California), creating overlap between groups and codes. Understanding this hierarchy—nexus, group, and code—is essential for managing taxes in NetSuite.
Finally, there’s the tax schedule, which is straightforward: it determines whether something is taxable or not taxable (a simple "yes or no").
Now that we’ve covered the basics, let’s explore how this looks in NetSuite.
On the home dashboard, navigate to Setup > Accounting, and scroll down to the Taxes section. Here, you’ll see options to manage nexuses, tax groups, tax codes, and more.
Starting with tax nexuses, you’ll find a list of all applicable nexuses for your NetSuite instance. For example, you might see entries for Texas, Pennsylvania, and Ohio. If you need to create a new nexus, click “New Nexus” and follow the prompts.
Next, let’s look at tax groups. Each tax group corresponds to a specific geographic area within a nexus. For instance, in Alaska, you’ll see several tax groups listed under different names. If you open one, such as "Alaska Wales," you’ll see the associated tax codes. In this case, there might be a 0% state tax and a city-specific tax for Wales.
For states like California, tax groups often include multiple layers. For example, a tax group for "El Dorado County" might have a state tax, a county tax, and additional codes like "California EMSR." To explore the tax codes within a group, simply click on the group name.
You can also view all tax codes directly by navigating to the tax codes list. Here, you’ll find a comprehensive overview of every tax code available in your NetSuite instance, including overlaps across different tax groups.
To set up taxes for the first time, start by creating nexuses for the states or regions where your business operates. After creating the necessary nexuses, navigate to Use State Sales Tax Tables in the Taxes section. Select a nexus (e.g., Alaska) and save the changes. This automatically imports all relevant tax groups and codes for that nexus, saving you the effort of manual entry.
Once your nexuses, groups, and codes are in place, you can adjust settings via Setup > Accounting > Setup Taxes. Here, you’ll find options for configuring tax agencies, home tax codes, and more.
Regarding tax updates, most businesses handle this manually once a year after closing out the prior year. While automation is possible, manual updates are often preferred to accommodate tax exemptions. For instance, if your business operates in agriculture and qualifies for certain exemptions, you’d manually set those exemptions to reflect a 0% tax rate for the applicable codes. This ensures your system accounts for your unique circumstances without overwriting exemptions during automatic updates.
If your business operates across numerous locations or generates a high volume of sales, managing taxes manually may become impractical. In such cases, consider using a service like Avalara, which has basically become the dominant tax tool for NetSuite. Avalara integrates seamlessly with NetSuite, automating updates while still allowing for manual exemption entries.
That’s it for this overview of taxes in NetSuite. For a deeper dive into taxes and accounting in NetSuite, check out my "NetSuite for Accountants" course. It covers a wide range of topics, including invoicing, billing, bank reconciliations, and month-end closes!