Calculating sales tax requires simple mathematical calculations. The most difficult aspect of figuring the amount of sales tax to charge or that you will be charged is identifying the specific local, county or city rates to charge.
Sales Tax Rates
The federal government does not charge sales taxes or establish sales tax rates. Instead, individual states are responsible for determining the percentage to charge on different items sold within its borders. Tax Foundation and the Sales Tax Clearinghouse provide regularly updated lists of state sales tax rates on their websites. Most state tax agencies also provide this information.
Many cities and counties also charge sales taxes. The respective governing bodies establish these rates. They are charged in addition to any state sales taxes. This information is commonly located on a county or city's website.
Figuring Sales Tax
The calculation for figuring sales tax is a 4 step process:
- Determine the tax rate
- Identify the sale price of the item
- Multiply the price by the tax rate
- Add the amount to the item's total price
Determine the Tax Rate
Determining the tax rate refers to identifying the total amount of tax you must charge. If, for example, your state has a three percent tax rate and your county and city each a one percent rate, the total tax rate applicable to any item sold in your city is five percent: 3 + 1 + 1 = 5.
However, determining the tax rate also refers to identifying the number you must use in your calculations. To transfer a percentage into a usable number for calculation purposes, you move the decimal point two spaces to the left. The decimal point is always located after the first number in the tax rate percentage. In the previous example, even though omitted, the decimal point is: 5.00, meaning that the tax percentage is 5.00 percent.
Moving the decimal point two spaces to the left may require you to add zeros before the first number (here, the 5). For example: 5.00 percent becomes .0500. For ease, you can remove the zeros at the end of the conversion, to have .05. This is the number that you will use to multiply the sale price by.
Identifying the Sale Price
An item's sale price is what a customer is charged for its purchase. This means that it includes any discounts or other reductions. For example, an item costing $100.00 having no applicable reductions has a sale price of $100.00, but an item costing $100.00 on sale for fifty percent off is $50.00. You calculate this by multiplying the converted reduction percentage (50 percent = .5 percent, according the explanation above) and then subtract the result from the price total. For example:
- 100 x .5 = 50
- 100 - 50 = 50
The result is the item's sale price: $50.00. Another example: a $100.00 item is on sale for 15 percent off:
- Convert the percentage reduction: 15 = .15
- Multiply the price by the converted value: 100 x .15 = 15
- Subtract the result from the total price: 100 - 15 = 85
- The result is the item's sale price including the discount: $85.00
This calculation is essential because it is the sale price including the discount that you use to calculate sales taxes.
Multiply the Price by the Tax Rate
In this step you multiply the sales price, including any discounts, against the converted tax rate. In the first example of a five percent tax rate, this calculation is: 100 x .05 = 5. The result is the total amount of sales tax charged for the item: $5.00.
Add Calculated Tax to Item Price
Finally, you add the amount of sales tax to the item to calculate the total sale cost, including tax: $105.00. This is what the customer must pay you or what you must pay the seller to purchase the item and fully pay your sales tax obligation.
If the example of the discounted item, the $85.00 item, was also subject to a five percent sales tax, the calculation would be:
- 85 x .05 = 4.25
- 85 + 4.25 = $89.25
Here, the customer would pay you or you would pay the seller $89.25 for the item.
Several websites offer online sales tax calculators. These sites assist you in calculating the total amount due, but usually require that you know the applicable sales tax rates for your state, county and city.
Exemptions from Sales Tax
Most states do not charge sales taxes on items sold by or to charitable organizations. Schools, churches and wholesalers often also enjoy this tax break. If you believe that your purchase or sales may fall within one of the tax exempt categories, contact your local tax agency. Your state, county and city tax authority will explain the specific provisions that an item must comply with to avoid sales tax.
Calculating Sales Tax
The process to calculate sales tax is not difficult, but may require the help of a calculator. After a few practices, you should find the process a breeze. However, don't be afraid to check your work to ensure that you charge or pay the correct tax amount.