The primary reason why rate components exist is to define how to calculate values to determine tax obligations. When you create rate components, the following factors indicate how these values should be calculated or determined:
Specify the value directly in the rate component.
Tell the rate component to use the value defined in a rate factor.
Tell the rate component to use the value calculated by a " for calculation purposes only" rate component.
Tell the rate component to call an algorithm to calculate the value.
The remainder of this section describes the rate factor approach. The other methods are discussed in Designing Rate Components.
Rate factors are frequently used to specify a tax rate. For example, you could specify the current tax rate (say 6%) directly in every rate's rate components OR you could indicate every rate should levy the current state tax rate and have the system look up the applicable rate when it calculates bills. The latter approach involves using a rate factor to indicate that the amount to charge should be retrieved from someplace other than the rate component when a bill is calculated.
You can use rate factors to define any of the following types of charges:
A flat amount. This would typically be used to define fixed charges such as fees.
An amount for a given unit of measure.
A percentage. This would typically be used for tax rates and exemption percents.
As a rule of thumb, you would use a rate factor (rather than specify the value in the rate component) when any of the following situations exist:
The same charge exists in many rates. For example, if there are 3 rates that all contain the same fixed charge, it would make sense to use a rate factor to levy this charge rather than specify the same value on 3 rate components.
The amount being charged is dependent on some physical characteristic of the taxpayer's location.
The amount being charged is dictated by some external organization and therefore can change independently from the rate. For example, city tax percentages are set by city taxing authorities and can be changed at any time (and you don't want to change the rate when these charges change).
The amount being charged varies depending on WHERE the taxpayer lives.
A charge is only levied for a subset of taxpayers for defined periods of time.
The charge differs per taxpayer.
As you can deduce, rate factors are extremely flexible. While the flexibility makes for a very powerful rating engine, it also presents you a dizzying array of options. We have discovered that to take advantage of the flexibility, you need to gain an overall understanding of the taxation provisions in ALL of your rates. Only then can you make logical and pragmatic decisions in respect of the number and type of rate factors.
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