How to Enforce Correct Tax Codes on Purchase Orders in Dynamics 365 Finance
A company using Dynamics 365 Finance notices that some purchase orders are being created with incorrect tax codes. The tax codes are determined by the vendor and item. What should they configure to enforce correct tax codes?
Quick Answer
The correct answer is to assign appropriate Sales tax groups and Item sales tax groups. This is because in Dynamics 365 Finance, the tax code applied to a purchase order is not set directly on the transaction but is instead determined by the combination of the Sales tax group (linked to the vendor) and the Item sales tax group (linked to the product). When these groups are configured correctly, the system automatically enforces the correct tax codes based on the vendor and item, preventing manual errors. On the MB-920 exam, this question tests your understanding of how tax setup flows through the procurement process, and a common trap is confusing direct tax code assignment with group-level configuration—remember, tax codes live inside groups, not on the order itself. A helpful memory tip: think of Sales tax groups as “who” (the vendor) and Item sales tax groups as “what” (the item); together, they lock in the correct tax code.
Answer choices
Why each option matters
Answer the question above first, then reveal the full breakdown to understand why each option is right or wrong.
Correct answer & explanation
✓
Assign appropriate Sales tax groups and Item sales tax groups
The combination of Sales tax group (assigned to customer/vendor) and Item sales tax group (assigned to item) determines the tax code applied to a purchase order. By configuring these groups appropriately, Dynamics 365 Finance automatically selects the correct tax code. Option B is incorrect because tax authorities and reporting codes manage tax reporting, not tax code assignment. Option C is incorrect because tax codes are assigned to groups (Sales tax group and Item sales tax group), not directly to each vendor/item. Option D is incorrect because tax exemption numbers apply to customers, not to enforcing correct tax codes on purchase orders.
Answer analysis
Option-by-option breakdown
For each option: why learners choose it and why it is or isn't the right answer here.
- ✓
Assign appropriate Sales tax groups and Item sales tax groups
Why this is correct
The combination of Sales tax group (from vendor) and Item sales tax group (from item) determines the tax code used.
- ✗
Set up tax authorities and reporting codes
Why it's wrong here
Tax authorities are for filing and reporting, not for determining tax codes on purchase orders.
- ✗
Define tax codes for each vendor and each item
Why it's wrong here
Tax codes are not directly assigned to vendors/items; they are assigned through sales tax groups and item sales tax groups.
- ✗
Configure tax exemption numbers for vendors
Why it's wrong here
Tax exemptions are for customers, not for purchase orders.
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Same concept, more angles
1 more way this is tested on MB-920
These questions test the same concept from different angles. Work through them to make sure you can recognise it however the exam phrases it.
Variation 1. A retail company using Dynamics 365 Finance notices that sales tax is not being calculated correctly on invoices for cross-border transactions. The tax setup includes multiple tax codes and tax groups. What is the most likely cause?
hard- ✓ A.Tax codes are not correctly assigned to the items or customers involved.
- B.The tax authority is not configured for cross-border transactions.
- C.The ledger posting group for sales tax is set incorrectly.
- D.Withholding tax is enabled for the vendor.
Why A: If tax codes are not assigned to items or customers, the system cannot determine the appropriate tax rate, leading to incorrect calculations. Option B is wrong because the tax authority configuration is about reporting and remittance, not calculation. Option C is wrong because ledger posting groups only affect where tax amounts are posted, not how they are calculated. Option D is wrong because withholding tax is a separate deduction and does not impact sales tax calculation.
JA
Written by Johnson Ajibi, MSc IT Security
Senior Network & Security Engineer · founder of Courseiva
This MB-920 practice question is part of Courseiva's free Microsoft certification practice question bank. Courseiva provides original exam-style practice questions with explanations, topic-based practice, mock exams, readiness tracking, and study analytics to help learners prepare for the MB-920 exam.