In some jurisdictions, including California, cannabis retailers have two types of taxes — Standard and Compound taxes. In this article, we will provide an explanation of how compound taxes work and how to set them up!

Explanation of Compound Taxes

How to Set Up a Compound Tax

Explanation of Compound Taxes

Standard taxes are taxes applied to the pre-tax price of an item. Compound taxes are applied to the total of the pre-tax price and the Standard tax. Here is an example where an Excise tax is a Standard tax and the Sales Tax is a Compound tax:

  • If the pre-tax price of a product is $10.00, and the Excise tax is 15%, the Excise tax would be $1.50 for a total of $11.50.

  • The Sales Tax is a Compound tax and is 10%.

  • Therefore, the Sales Tax would be 10% of $11.50, or $1.50, for a total of $13.00. This is visually summarized below.

Compound taxes require a Standard tax to be applied to the price of a product, therefore if there is no Standard tax applied to an item on an order, the Compound tax will also not be applied.

Compound taxes are then applied in the particular order that they are set up to be applied in when creating them. The first Compound tax is calculated based on the pre-tax price plus any standard taxes for the item. The second Compound tax is calculated based on the sum of the pre-tax price plus the Standard taxes plus the first Compound tax. In the unlikely event that there is a third Compound tax, it is calculated based on the sum of the pre-tax price plus the Standard taxes plus the first Compound tax plus the second Compound tax.

In summary, Standard taxes always apply to the pre-tax price. Compounded taxes always apply to the pre-tax price plus the standard taxes plus any preceding compounded taxes. This is visually summarised below.

How to Set Up a Compound Tax

1. Navigate to your Settings page.

2. Click on the Taxes button to bring up your Tax settings page.

3. Click on the green plus button to add a new tax rate.

4. Enter the Tax Name you are assigning this tax.

5. Enter the Tax Rate for this tax.

6. Choose what product categories the tax applies to.

7. Choose either Standard or Compound for your tax type. For this example, we will be selecting Compound.

8. Select what order this Compound Tax should be applied in, either First, Second, or Third.

9. Designate any Exclusions that this tax requires.

Finally, make sure all the information entered is correct and click Save & Close. Now you have created a Compound Tax! Nice work. 🌟

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