What is tax classification ?

There are different kinds of taxes that are relevant for SD. The fundamental tax type that SD consultants need to worry abt is Sales Tax. There might also be further variations in Sales tax like VAT , state sales tax etc.

The basic premise for taxation is at the material and customer level. Certian materials might be tax-exempt. Certian customers might be tax-exempt(eg. resellers). Certian customers/materials might be partially taxable or with low-tax rates.

The tax category of the customer and material are set respectively in the customer/material master.

1. Tax categories in Customer master
1. 
2. The typical examples of tax classification are as 0- tax-exempt , 1- liable to taxes, etc
3. The tax classification as computed in pricing(tax condition types with classification D or E)
2. Tax Categories in Material master
1. 

For a sales order in most of the cases ,the tax calculations as done in the pricing procedure for condition types with classification-tax (eg , MWST , UTXJ,XR1..etc) is based on first determining the tax classification of the customer/material and the country codes of the customer and the delivering plant.

1. The customers tax classification is trickled down to the sales document in the following order.
1. Payer (if different from sold-to)
2. Ship-to (if maintained)
3. sold-to (if not maintained in ship-to)
2. The material tax classification is straight forward.
3. Tax classifications are also maintained at Country/Region(state) level.

So for example UTXJ tax condition type is based on the above combination of customer/material/country/region tax classifications.