Sales Tax (Escrow Percentage Fixed)

General

There is more than one way to add sales tax to a loan or lease, but this article specifically addresses adding sales tax through escrow using the percentage-fixed calculation to determine how much of each payment should apply to sales tax.

The way this method works is as follows:

  • An escrow bucket is set up to collect sales tax
  • The settings for Payment Application and Payoff are set to "Percentage Fixed"
  • When a loan is created, the settings in the Escrow Calculator for this bucket should be:
    • Percentage Base - "Base Payment Amount"
    • Sales Tax Percentage - The sales tax percentage for the loan/lease
    • Term - The term of the loan/lease
  • Each time a payment, including payoff payments, is made, the correct portion of the payment will be applied to sales tax, regardless of the payment amount.

This is different from the standard payment application, in which a specific amount of escrow would come due in a payment period, and the payment would apply to each component in a specific order.

For example, in a standard application, if $100 of principal, $200 of interest, and $10 of sales tax was due, and the payment waterfall application order was escrow, interest, principal, then, if the customer made a $150 payment, $10 would apply to sales tax, and $140 would apply to interest.

In this percentage-fixed application, if the sales tax percentage was entered as 6.6%, $9.29 would apply to sales tax and $140.71 would apply to interest. This is calculated as:

$$Base Payment X Sales Tax Percentage = Sales Tax$$

$$Payment - Sales Tax = Base Payment$$

Calculating the base payment requires simple algebra:

Base Payment = BP

Payment Amount = $150

Sales Tax = BP X 0.066

$$Payment Amount = Base Payment + Sales Tax$$

Therefore:

$$ $150 = BP + 0.066BP $$

Therefore:

$$ $150 = 1.066BP $$

Therefore:

$$ BP = {$150} / {1.066} $$

Note: The base payment amount does include fees or non-payment-fixed-application escrow buckets.

This means that the payment amount from the equation above would be calculated as Amount Paid - Amount Applied to Fees - Amount Applied to non-percentage-fixed-application escrow buckets.

Note that waterfall application still applies to everything but percentage-fixed-application escrow buckets. That means that if $10 of a $200 payment is paid to percentage-fixed-application escrow buckets and there is $150 of interest due and $50 of principal due with a waterfall application order of interest then principal, $150 will apply to interest, $40 to principal, and $10 to escrow.

If multiple escrow percentage-fixed-application buckets exist on the same account, the percentage of the payment allocated to a bucket is calculated as interest + principal + percentage-fixed escrow buckets created after the current one. For example, if a $200 dollar payment applies as follows:

Payment Piece

Amount

Escrow

$26.52

Sales Tax (6.6%)

$12.38

Escrow (5%)

$8.93

Escrow Additional (3%)

$5.20

Interest

$173.48

Then the calculation of the sales tax amount is as follows:

($173.48 + $8.93 + $5.20) x 0.066 = $12.38 (rounded)

The calculation of the Escrow amount is as follows:

($173.48 + $5.20) x 0.05 = $8.93 (rounded)

And the calculation of the Escrow Additional amount is:

$173.48 x 0.03 = $5.20 (rounded)

Sales Tax Bucket Setup

The first step in collecting sales tax in this way is to set up a new escrow bucket. This bucket should be named Sales Tax so it's clear what it's designed to collect. To set up the escrow bucket, navigate to Settings > Loan > Escrow > Buckets inside your LoanPro account.

Click Add.

Enter the information needed to set up the bucket. Give the bucket a title like Sales Tax, and make sure Payoff and Payment Application are both set to "Percentage Fixed". Click SAVE.

Set Up a Loan

To set up a loan using a percentage-fixed escrow bucket to collect sales tax, follow your standard procedure for setting up a loan. 

It is required that you use the Escrow Calculator to make sales tax collection work correctly. Choose "Base Payment Amount" from the Percentage Base drop-down. Enter the sales tax as a percent, not a decimal (e.g. 6.6, not 0.066) in the Sales Tax Percentage field. This field uses the name of the escrow bucket, and may be called something different depending on the name you chose. Enter the same Term as you entered for the loan.

Once everything is entered, Save & Calculate the loan and Activate it. You are now ready to collect sales tax.

Adjust an Existing Loan

If you have a loan that has already been created, you can adjust the escrow to work as a percentage fixed. In order to do this, navigate to Loan Settings > Escrow inside the loan.

Make sure you have selected the correct escrow bucket. Navigate to the ADJUSTMENTS section and click Add.

Now click the button.

Do the following:

  • Change the Percentage Base to "Base Payment Amount"
  • Enter the sales tax percentage in the Percentage field
  • You can either leave the term the way it is, or you can enter the loan term in the Term field. If you leave the term at 1, there will be an extra adjustment created that should be deleted, but the sales tax will apply for the life of the loan. If you enter the term of the loan, sales tax may not be assessed after the original loan term is over.

When this is done, click Apply

If you chose to enter the loan term as the term of the loan, you are done. If you chose to leave the term at 1, two adjustments will be shown. In order to make sales tax persist for the duration of the loan, only keep the first adjustment. To delete adjustments, click the delete icon.


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