The amount that is charged by state and central governments from consumers for purchasing specific goods and services is known as sales tax. It is referred to as a pass-through tax because the business that is collecting the sales tax does not contribute any amount towards it, nor do they keep it. The sales tax is added to the total sales price of the goods and services purchased by the consumer and then passed on to the government.
What is Sales Tax?
In most countries, the sales tax is also referred to as VAT (or value-added tax) or GST (goods and service tax), which are different forms of sales tax. The listed price of the goods includes sales tax in some countries and is the after-tax price, whereas in other places, the listed prices are before-tax prices, and the sales tax is applied at the time of purchase.
Most of the goods that are offered in the retail setting are taxable along with services like phone services and utility. In many states, products like food items and prescription medicines are exempt from the tax as they are considered essential items that are needed to survive by the consumers.
Both the local and state governments establish the tax rates, and in the United States, it varies between 4% – 8%. Most of the states levy sales tax except some like Montana, Delaware, and Alaska in the United States.
Business entities and the employees that work in it must have thorough knowledge about sales tax, why it is collected, the correct amount to collect and how to collect it so that there is no discrepancy in the books later on. In-depth knowledge is a blessing to ensure that all the rules and regulations about the matter are complied with.
The rules regarding sales tax are very explicit so that the businesses can collect the tax from the consumers. This money is used by local and state governments to fund several things, for instance, healthcare, emergency services, public schools, public transportation, and construction and maintenance of roads.
It is the end-user who has to pay the sales tax, and this is why people who have purchased the goods and intend to resell it are exempted from paying them once again. The person who is reselling will have to acquire a resale certificate to get the exemption.
It will now be his responsibility to collect the sales tax from the end-user after the final sale of the product and pass it to the government.
How to calculate sales tax?
The sales tax is fixed by the local and state governments and is dependent on the goods or services that consumers are purchasing.
The formula for calculating the sales tax is
Sales tax = selling price * sales tax rate
For example, Sherry has decided to buy a car, and its price is listed as 10,000 dollars before sales tax, which is levied at 7% on the vehicle. If we refer to the formula,
Sales tax = selling price * sales tax rate
Sales tax = 10,000 * 7%
Sales tax = 70,000/100
Sales tax = 700 dollars
Actually Sherry had to pay 10,000 + 700 = 10,700 dollars for her car.
6 Steps in Preparation for Sales tax Calculation
The following steps are used by business to calculate sales tax
1. Gathering the necessary information
The rate of sales tax is not fixed. It often varies from place to place and even item to item. In some places, the government levies a local sales tax, whereas, in others, it is a combination of state and local.
It becomes essential for a business entity to gather all the related information so that it can operate successfully. The first thing it should do is be clear that it has to levy a state sales tax or local or a combination of both. Then the amount of sales tax rates that are fixed on various goods as well as services.
2. Calculate the combined sales tax rate
The business entity cannot levy two or three types of sales tax rates individually as it will create unnecessary hassles. It gathers information about the various rates and combines them as a single figure that will represent that area’s total sales tax rate.
It will include state and local rates, including county and city. The method to calculate the combined sales tax rate is straightforward. Just add all of them to get a single sales tax rate. Some business houses operate in more than one state.
They will have to calculate the rate of sales tax as per the state in which they are operating. It will have to levy different rates for its business in different states.
3. Determine which are taxable goods and services
Every goods and service that a business entity offers is not taxable. Some of them are exempt from it as they are considered essential, and the government does not levy any sales tax on it.
Gather all the relevant information and determine which one of the goods and services you are dealing with are considered taxable and which is exempted if you are looking for ways to calculate sales tax.
Be accurate; otherwise, you will be collecting the wrong amount of money, and at the end of the day will have to manage the difference through your pockets.
4. Know about sales tax holidays –
It is essential to know about the sales tax holidays and which of the goods and services are considered tax-free during this holiday if you are looking for ways to calculate the sales tax rate accurately.
The sales tax holidays are a short-time period when a consumer does not have to pay any sales tax. The length of the holiday varies from a single day to a weekend or a week. The consumers can make bulk purchases during this period as they are not paying the taxes.
It is not necessary that every state will have a sales tax holiday or that the states which have it will exempt all the goods and services during this time. The specific items that have been exempted from the taxes are mentioned beforehand to avoid any confusion later on.
5. Find out about the total sales price
When a business entity calculates sales tax for a single item then the total price is often the price that is listed on the product. It means that the listed price is inclusive of the taxes.
While calculating the sales tax, find the total sales price of taxable items and non-taxable items separately to make your work easier if you are looking for ways to calculate sales tax accurately.
6. Use the formula
If you are looking for ways to calculate the sales tax, then use the sales tax formula to make your work easier. Levy combined sales tax rate in the formula to get the total taxable price which the consumer owes.
The formula for calculating the sales tax is Sales tax = selling price * sales tax rate. The final sales amount formula is
Final sales amount = total taxable amount + sales tax amount + total non-taxable sales price
Sales tax is levied on the purchase of goods and services, and it is the end consumer who has to pay it. These indirect taxes are an essential aspect of business as the amount collected is used by the government for the welfare of its citizens.