What's the difference between using tax exemptions and tax rules to modify the taxable nature of a transaction?

You can use either use tax rules or tax exemptions to modify the taxable nature of a transaction.

Tax rules, such as the Determine Tax Applicability rule, exclude certain categories of transactions from taxation. Such transactions don't appear on many tax reports as they don't have any tax lines.

To report on a transaction, set up a tax exemption on the party tax profile of the customer. This results in the creation of a tax line with modified tax rate. You can use tax exemptions for specific customers who have certificates of exemption. This happens typically in tax regimes for US Sales and Use Tax.

You can create an exempt tax rate with a zero percentage rate to apply exemptions and generate a tax line.

Note:

• Reports referring to an item as exempt may exclude items with zero percentage rate as the exempt indicator there is blank.

• If you define an exempt tax rate with a zero tax rate, the transaction shows as fully taxable on all reports. Don't add exemption details if you want reports to show the full line amount as taxable.