Use Case: Downgrade of a plan without refund in Invoice Settlement
Summary:
When a customer downgrades her plan, a credit memo is generated as a part of the Bill Run. The merchant immediately performs the downgrade (as opposed to at the end of the invoice period) and does not want the credit memo to be refunded to the customer. Hence, the merchant creates a debit memo equivalent to the credit memo amount & uses it against the credit memo. Once taxes are enabled, the credit memo generated would also contain an additional tax amount.
The following 2 scenarios describe the steps about downgrade of a plan without refund considering the tax location change.
Scenario 1: Invoice and credit memo have tax, and tax location doesn’t change
Precondition:
A customer subscribes to an annual service "Enterprise Plan" with $200 per year starting from 2020-1-1. The tax rate is 10%.
The customer has Sold To Address #1.
Steps:
STEP 1: Generate an invoice:
INV-001: Total amount without tax $200, tax amount $20, Total amount $220.
Invoice Item 1 (Enterprise Plan): amount $200, tax amount $20.
Tax is calculated with Sold To Address #1.
STEP 2: Generate a credit memo
Then the customer downgrades the service to Business Plan which is $160 per year. It removes the Enterprise Plan, and adds a Business Plan with an effective date 2020-7-1. It generates a credit memo.
CM-001: Total amount without tax $20, tax $2, Total amount $22.00
Credit Memo Item 1 (Enterprise Plan): amount $100, tax amount $10 (Tax is calculated with Sold To Address #1.)
Credit Memo Item 2 (Business Plan): amount $-80, tax amount $-8 (Tax is calculated with Sold To Address #1).
STEP 3: Write-off the credit memo with a debit memo
Create a debit memo from INV-001, picking up the Invoice Item 1 (Enterprise Plan). In UI, select Tax Auto Calculation, input amount $20. It creates debit memo below:
DM-001: Total amount without tax $20, tax $2, Total amount $22.00
Debit Memo Item 1: Total amount $20, tax $2.
Tax is calculated with Sold To Address #1.
You can use the API as well: https://www.zuora.com/developer/api-reference/#operation/POST_DebitMemoFromInvoice
Scenario 2: Tax location is changes after the invoice is generated
Precondition:
A customer subscribes to an annual service "Enterprise Plan" with $200 per year starting from 2020-1-1. The tax rate is 10%.
The customer has Sold To Address #1.
Steps:
STEP 1: Generate an invoice:
INV-001: Total amount without tax $200, tax amount $20, Total amount $220.
Invoice Item 1 (Enterprise Plan): amount $200, tax amount $20.
Tax is calculated with Sold To Address #1.
STEP 2: Change location
The customer changes the address from Sold To Address #1 (tax rate is 10%) to Sold To Address #2 (tax rate is 8%).
STEP 3: Generate a credit memo
Then the customer downgrades the service to Business Plan which is $160 per year. It removes the Enterprise Plan, and adds a Business Plan with an effective date 2020-7-1. It generates a credit memo.
CM-001: Total amount without tax $20, tax $3.6, Total amount $23.6
Credit Memo Item 1 (Enterprise Plan): amount $100, tax amount $10 (Tax is calculated with Sold To Address #1.)
Credit Memo Item 2 (Business Plan): amount $-80, tax amount $-6.40 (Tax is calculated with Sold To Address #2).
Note: Credit Memo Item 1 was created from the same subscription rate plan charge as Invoice Item 1. So it can detect the right address.
STEP 4: Write-off the credit memo with a debit memo
Create a debit memo from INV-001, picking up the Invoice Item 1 (Enterprise Plan). In UI, unselect Tax Auto Calculation, input amount $20, tax amount $3.6. It creates debit memo below:
DM-001: Total amount without tax $20, tax $3.6, Total amount $23.6
Debit Memo Item 1: Total amount $20, tax $3.6
You can use the API: https://www.zuora.com/developer/api-reference/#operation/POST_DebitMemoFromInvoice
Tax Auto Calculation doesn't work because Tax will be calculated with address Sold To Address #1 which is the same as the invoice item 1. So you need input the tax manually in order to write-off the credit memo.
Note: As you unselect Tax Auto Calculation, the debit memo will NOT go through 3rd party Tax Engines. As a result, the debit memo is created with 2 items (debit memo item 1, and its tax item). The disadvantage is that the tax amount for this debit memo will not be synced to3rd party Tax Engines. Your taxation team need be aware it when they reconcile the tax between Zuora and 3rd party Tax Engines.
As you can see from the example, the credit memo and debit memo use the same location for tax calculation as the invoice, in the following scenarios.
- The credit memo is generated due to the downgrade.
- The credit memo and debit memo are created from the invoice.
