Compound Taxes (Tax on Tax)

Cloudbeds PMS now supports compound taxes, also known as tax on tax. This feature allows you to charge a tax directly on top of another tax, rather than only on the base room rate. This is required for certain jurisdictions worldwide - including Edinburgh, Scotland and Quebec, Canada - where specific tax rules require one tax to be calculated on the amount of another.

Overview

Before this feature, properties that needed compound taxes had to work around the limitation by applying taxes on top of fees. Compound taxes allow you to correctly set up these scenarios using proper tax types, improving accuracy in your folios and financial reports.

What you can now do:

• Charge a tax on top of another tax (e.g., VAT applied to a visitor levy)
• Charge a tax on top of a fee (existing behavior, now more flexible)
• Create taxes that apply only to other taxes or fees, without requiring a reservation or product to be selected
• Mix and match - a single tax can apply to reservations, products, other taxes, other fees, or any combination 

How it looks

When creating or editing a tax or fee, you will see options under Available For. Previously, you were required to select at least one of Reservations or Products. Now, these selections are optional. You can instead (or in addition) select:

• Charge on top of Tax - applies this tax to the calculated amount of another tax
• Charge on top of Fee - applies this tax to the calculated amount of a fee

How to Set Up Compound Taxes

Before setting up compound taxes, make sure you have reviewed the existing Types of Taxes and Fees and Taxes and Fees - Everything You Need to Know.

Step 1: Create the base tax

Create the tax that will serve as the base (e.g., the room rate tax or a visitor levy). This is the tax that the compound tax will be applied on top of.

1. Account -> Settings -> Finance -> Taxes and Fees
2. Click +New tax or fee
3. Configure the tax name, type, rate, and whether it is inclusive or exclusive.
4. Under Available For, select Reservations and/or Products as applicable.
5. Click Save

Step 2: Create the compound tax

Now create the tax that will be calculated on top of the base tax.

6. Click +New tax or fee
7. Enter the tax name, rate, and type.
8. Under Available For, uncheck Reservations and Products if this tax should only apply to another tax. Then check Charge on top of Tax and select the base tax from the dropdown.
9. Click Save

Examples

Example 1: Edinburgh, Scotland

Edinburgh requires two taxes for accommodation, both charged inclusive (embedded in the quoted gross room rate): a 6% Visitor Levy and a 20% VAT. The VAT applies to the room revenue and to the Visitor Levy — making this a compound tax scenario. Because both taxes are inclusive, the system divides the quoted gross rate by the combined factor to arrive at the net room revenue, then allocates each tax from that net amount.  

The Visitor Levy is configured as 6% because a 20% VAT is added on top of the 5% Levy.  This calculates the total amount of the Levy, including VAT, to be 6% of the Gross value.

How the taxes calculate on a €100 quoted gross room rate:

• Net Room Revenue: €100.00 ÷ 1.26 = €79.37 (the combined inclusive factor is 1.2 × 1.06 = 1.26; both taxes are divided out of the quoted rate)
• VAT on Room Revenue: €79.37 × 20% = €15.87
• Visitor Levy: €79.37 × 5% = €3.97
• VAT on Visitor Levy: €3.97 × 20% = €0.79 (compound tax — VAT applied to the levy amount)
• Guest total: €79.37 + €15.87 + €3.97 + €0.79 = €100.00 (equals the quoted gross rate — confirms all taxes are fully inclusive)

Reservation folio example — Edinburgh (1 night, €100 quoted gross rate)

Example 2: Quebec, Canada

Quebec uses three taxes for accommodation, all charged exclusively (added on top of the room rate). The GST and QST both apply to the room revenue and to the lodging tax, making this a compound tax scenario.

How the taxes calculate on a $100 room rate:

• Room Revenue: $100.00
• Lodging Tax: $100.00 × 3.5% = $3.50
• GST on Room Revenue: $100.00 × 5% = $5.00
• GST on Lodging Tax: $3.50 × 5% = $0.18
• QST on Room Revenue: $100.00 × 9.975% = $9.98
• QST on Lodging Tax: $3.50 × 9.975% = $0.35
• Guest total: $100.00 + $3.50 + $5.00 + $0.18 + $9.98 + $0.35 = $119.01

Reservation folio example — Quebec (1 night, $100 room rate)

Things to Note

• Order matters: Create the base tax before creating the compound tax that applies to it. The parent tax must exist to be selectable.
• Existing reservations: Adding a compound tax to a source will prompt you to recalculate future reservations. See Add or apply taxes and fees for details on recalculation behavior.
• OTA connections: If you are connected to distribution channels, make sure the same tax configuration is reflected on the channel side to avoid rate discrepancies.
• Reporting: Compound taxes appear as separate line items in the reservation folio and in your financial reports, making it easy to reconcile each tax obligation independently.