The process of applying a tax algorithm to an invoice is known as a tax rating.
To rate an invoice means to process each line in an invoice and determine if the product or service may be taxed in the governing jurisdiction, and then output each tax item generated from the invoice line item.
Tax rating algorithms generate one or more tax transaction records for each line item in an invoice. The individual transaction records, or a summary of the total of all the records, is then encoded into the rated invoice by updating the invoice headers and subtotals.
For a tax rating algorithm to work three essential elements must be present:
- A tax situs database that uses geographic coordinates to lookup all applicable tax laws
- A product coding system that properly classifies the tax status of each product and service
- Data models that support rated invoices