Applying taxes on a purchase order

Taxes on a purchase order represent the value-added tax (VAT), goods and services tax (GST), import duty, or other tax obligations that apply when you purchase goods or services from a vendor. Applying taxes correctly on the purchase order ensures that your cost of goods matches the invoice and that your accounting is accurate.

Before you start

• Purchase order with line items: You should have already created the purchase order and added all items.
• Tax rules: Know which taxes apply to the items you are purchasing. This depends on the item type, the vendor's location, and your company's jurisdiction.
• Tax rates: Have the correct tax rate(s) applicable to the order. Your administrator may have pre-configured standard tax rates.

Steps

Apply a tax manually

1. On the purchase order form, locate the Taxes section (usually near the discounts and totals).

2. Look for an Add Tax button or a Tax dropdown field.

3. Click to add a tax or select a pre-configured tax rate.

4. If adding manually, select the tax type (e.g., VAT, Import Duty, GST, or a custom tax name).

5. Enter the tax rate as a percentage (e.g., 15 for 15% VAT). Alternatively, if your system supports it, you can enter a fixed tax amount.

6. The system calculates the tax amount based on the order subtotal (after discounts) and adds it to the total.

7. Review the tax amount to ensure it is correct.

Apply a pre-configured tax

1. If your company has standard taxes configured for vendors or product types, the tax may be suggested automatically when you select the vendor or add items.

2. Review the suggested tax and confirm it is correct.

3. If the suggested tax is incorrect, remove it and add the correct tax manually.

Accounting impact

Taxes on the purchase order become part of the cost of goods. When you receive the goods and the vendor's invoice is recorded, the tax is matched to the invoice. For input tax (VAT on purchases), you may be able to claim the tax as a credit against your output tax, depending on your jurisdiction's rules.

Tips & common mistakes

• Different items may have different tax rates. If some items are tax-exempt and others are taxable, configure multiple tax lines if necessary.
• The tax on the purchase order should match the tax on the vendor's invoice. If there is a difference, contact the vendor to clarify.
• Ensure that the tax base is correct: taxes are typically applied to the subtotal after line discounts but before or after document-level discounts, depending on your company's policy. Verify with your accountant if unsure.
• If the purchase order is in a foreign currency, the tax is calculated on the converted amount in your base currency.
• Some jurisdictions require specific tax codes or classification. Ensure your company's tax configuration aligns with local regulations.