The standard R/3 System includes condition types that define country-specific sales taxes. For example, there are condition types for Value-Added Tax (VAT) for use in some European countries. For tax determination in the U.S., the standard system includes condition types for state, county, and city sales taxes, as well as taxes based on tax jurisdiction codes.

During the automatic calculation of sales taxes, the system takes the following factors into account:

• Whether the business being transacted is domestic or foreign
• The tax classification of the customer's ship-to party.(Customers who are non-profit organizations, for example, may be exempt from paying sales tax.)
• The tax classification of the material.(Some products may not be taxed at all while others may have a reduced tax rate.)

With the help of these criteria, the tax rate per item is determined in the sales order. In Customizing, you set up a separate condition type for the tax rate (taxes on sales and purchases).

You specify the tax classification for a material in the material master record. During sales order processing, the system automatically transfers the tax classification into the sales document.

You specify the tax classification for a customer in the customer master record. During sales order processing, the system automatically transfers the tax classification into the sales document.