TL;DR

This guide walks through how to set up, calculate, and report sales tax in Dynamics 365 Business Central. It explains key concepts like nexus, tax groups, tax jurisdictions, tax areas, and tax details, and shows how different customer and item scenarios (taxable, non-taxable, exempt) affect sales tax calculation. It also highlights how to use reporting and analysis tools to make sales tax returns easier and more accurate.

In this video, I walk through how to set up and use the sales tax functionality in Dynamics 365 Business Central. We’ll look at how sales tax is calculated, what drives those calculations, and how the results appear on transactions. We’ll also cover how to properly configure sales tax to ensure accuracy, and we’ll finish with sales tax reporting, which is essential for completing sales tax returns in the states where you do business.

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Reviewing a Sales Invoice with Sales Tax

Starting with a Taxable Invoice

Let’s begin by reviewing a sales invoice that’s already set up. The invoice hasn’t been posted yet, but it includes a taxable customer and a taxable item that’s assigned to a tax group, so sales tax is calculated automatically. On the invoice, you can see the selected customer, confirm that the customer is taxable, and see the taxable item—a chair—on the line.

When I scroll across the invoice, you can see that sales tax has already been calculated. You’ll also notice that the customer has been assigned a default tax area code. We’ll look at that tax area in more detail shortly.

Viewing Sales Tax Details on the Invoice

To dig into the calculation, we can open the invoice Statistics page. This displays a breakdown of the sales tax applied to the invoice. In this case, the invoice is assigned to the La Mesa, CA tax area. You can see the calculated tax amount and the individual tax lines.

There are five tax lines on this invoice, which is important because it means there are five distinct tax details that roll up into the La Mesa, CA tax area. These tax details are what ultimately drive both calculation and reporting.

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Setting Up Sales Tax in Business Central

Using Assisted Setup

There are several ways to configure tax groups and tax details in Business Central. One of the easiest ways to get started is by using Assisted Setup. From Assisted Setup, you select Set up sales tax. In this example, a tax group called Taxable has already been created.

You can add as many tax groups as needed, which is especially useful when you do business in multiple states or sell items with different taxability rules. After selecting the appropriate accounts, you can move through the setup process.

Example: Brooklyn, New York Sales Tax

As an example, let’s look at sales tax for Brooklyn in 2025. This tax setup includes multiple components: New York State, New York City (Brooklyn), and a metropolitan commuter transportation district. Brooklyn is part of New York City, and in this case, there’s no separate county tax to consider.

The New York State tax is set at 4%. Once it’s named and configured, I choose not to apply it automatically to all customers, since that would affect every customer in the system. This completes the initial setup. Assisted Setup is a great way to establish a baseline configuration.

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Understanding Sales Tax Calculation Concepts

Taxability and Nexus

In the United States, sales may or may not be taxable depending on the customer and the item. A customer may be exempt, or an item may be non-taxable. Whether you need to collect and remit sales tax depends on whether you have nexus in a given state.

Each state has its own nexus rules. If you have nexus in a state and sell to customers there, you must determine whether you need to collect sales tax and, if so, remit it and file sales tax returns on a regular basis.

Example: Nexus in California

This walkthrough focuses on California, specifically La Mesa, CA. If you sell to customers in California, you need to confirm whether you have nexus in the state. Physical presence is one key factor, such as having an office or employees in the state. Another common factor is total gross sales.

In California, if you sell more than roughly $500,000 worth of goods or services into the state, you may be required to collect and remit sales tax and file returns, even if you’re based elsewhere.

Customers and Items

You also need to determine whether customers are taxable or exempt. For example, many state agencies in California are exempt from sales tax. In addition, you must identify whether the items you sell are taxable.

In Business Central, this means defining taxability at both the customer level and the item level, and then confirming you have nexus in the relevant location.

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Key Components of Sales Tax in Business Central

Tax Groups

Tax groups are assigned to items, and sometimes to labor, to indicate whether they are taxable, exempt, or non-taxable. As your business grows into more states, you’ll refine these groups to make tax determination easier.

In this example, there are tax groups for taxable items, exempt items, non-taxable items, and other categories that support accurate calculation and reporting.

Tax Jurisdictions

Tax jurisdictions represent the taxing authorities involved in sales tax calculation. These can include states, counties, and cities. In this example, the relevant jurisdictions are the State of California, San Diego County, and the City of La Mesa.

These jurisdictions roll up into the State of California because, in most cases, you file a single state return on a monthly, quarterly, or annual basis.

Tax Areas

Tax areas define combinations of jurisdictions used to calculate tax. For La Mesa, CA, the tax area includes five separate tax details. When you sell to a customer in La Mesa, Business Central calculates all five and includes them in reporting and returns.

Tax Details

Tax details define the specific rates and rules within a tax area. In this example, the total California tax rate is 8.5%. The details are broken down into taxable, non-taxable, and exempt categories.

For taxable sales, the five tax details include state, city, county, and other related components. These are the rates Business Central uses when calculating sales tax on an invoice.

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Enhancing Tax Review with Analysis

Using Analysis Mode

The standard Tax Details list can be enhanced using Business Central’s Analysis feature. In this example, I added a field called Reports to Tax Jurisdiction to make it easier to see how tax details roll up to higher-level jurisdictions.

By adding this field from the Tax Jurisdiction table and pulling it into the analysis rows, you can expand and review tax relationships more easily. I also added the Tax Group Code, which allows me to see how tax details are grouped under each jurisdiction.

This approach makes it much easier to manage and review tax setups, especially when dealing with multiple states and cities.

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Aligning Tax Setup with the Sales Tax Return

Designing for Easy Reporting

When you look at the California sales tax return for 2025, you’ll see it’s broken down into state, county, and local taxes. By setting up tax details in Business Central to match this structure, it becomes much easier to fill out the return.

For example, you can enter totals from the California state tax detail in the state section, San Diego County totals in the county section, and La Mesa totals in the local section. Designing your setup with the return in mind saves time and reduces errors.

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Real-World Sales Tax Examples

Taxable Sale

In the first example invoice, the customer is marked as tax liable, and the default tax area is La Mesa, CA. The item, a Swivel Chair, is assigned to the Taxable tax group. Together, these settings result in sales tax being calculated correctly on the invoice.

Non-Taxable Sale for Resale

In the next example, the customer is taxable, but the sale is for resale. In California, resale transactions are non-taxable. No sales tax is calculated, but the transaction is still tracked as non-taxable for reporting purposes. This helps ensure accurate reporting on the sales tax return.

Exempt Customer Sale

In the final example, the customer is exempt from sales tax, such as a state agency. The customer is marked as not tax liable, and the item is assigned to an Exempt tax group. No tax is calculated, but the transaction is still included in reporting so exempt sales can be disclosed on the return if required.

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Sales Tax Reporting

Sales Tax Collected Report

The Sales Tax Collected report shows total sales and tax amounts by jurisdiction. When filtered to California, it provides a high-level summary of taxable, non-taxable, and exempt sales.

Detailed Sales Tax Reports

More detailed reports break sales down even further. These reports are typically used to prepare sales tax returns because they clearly separate taxable sales, non-taxable sales, and exempt sales.

Sales Tax Detail List

The Sales Tax Detail List report is useful for reviewing how tax details are configured. Since tax details directly drive calculation, it’s important to review this report periodically to ensure accuracy.

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Summary

In this walkthrough, we covered how to set up sales tax in Dynamics 365 Business Central, reviewed multiple transaction scenarios, and explored key sales tax reports. We examined how sales tax is calculated based on customers, items, and nexus location, and how proper setup ensures accurate results. Finally, we looked at reporting tools that make it easier to complete sales tax returns at the end of each reporting period.