Sales Tax Formula: How to Calculate Sales Tax

In this article, we’ll cover everything you need to know about sales tax. You’ll learn what sales tax is and if you even need to charge sales tax. Then, we’ll share a variety of different formulas to help you figure out how to calculate sales tax for your business. Determining which laws apply to your business is hard, but it’s a crucial step toward compliance. For more information, please refer to our seller’s guide to nexus laws and sales tax collection requirements. If you sent an invoice to the customer for later payment, the entry is a debit to the accounts receivable account and a credit to the liability account for sales taxes payable.

Of the many different methods tested, sales tax prevailed because economic policy in the 1930s centered around selling goods. Mississippi was the first in 1930, and it quickly was adopted across the nation. Today, sales tax is imposed in most states as a necessary and generally effective means to raise revenue for state and local governments. The sales tax rate ranges from 0% to 16% depending on the state and the type of good or service, and all states differ in their enforcement of sales tax. In Texas, prescription medicine and food seeds are exempt from taxation.

How is an excise tax different from a sales tax?

In some locations, rates for two adjacent addresses can be different. Relying on a city or ZIP code is not the most reliable way to calculate sales tax rates. In the United States, sales tax at the federal level does not exist. At the state level, all (including District of Columbia, Puerto Rico, and Guam) but five states do not have statewide sales tax. These are Alaska, Delaware, Montana, New Hampshire, and Oregon. States that impose a sales tax have different rates, and even within states, local or city sales taxes can come into play.

For example, you sell your products from a real space that’s located in Illinois. You have a physical connection to the state in the form of an office and a location from where you store and ship your products from. If you’re selling online through a major website, you usually don’t have to do anything towards the collection of sales taxes. The sites are designed to charge sales tax according to the state the buyer lives in on your behalf. Sales tax is a type of tax that’s charged at the time an item or service is sold. The buyer pays the tax to you, and you remit the tax to the relevant government tax collection body.

Calculating Sales Tax Rate

Once you know the sales tax rate you need to collect at, use the sales tax formula to calculate how much to charge the customer. In the US and the District of Columbia all states except Alaska, Delaware, https://simple-accounting.org/understanding-the-cost-of-bookkeeping-for-small/ Montana, New Hampshire and Oregon impose a state sales tax when you buy items or pay for services. Alaska however does allow localities to charge local sales taxes as do many other states.

Businesses are then responsible for remitting it to the government. To determine your taxable amount, add together all fees on your bill of sale except Gap Insurance, Finance Charges, and Sales Tax. Besides, it’s quite likely that you’ll find our margin calculator or the margin with sales tax calculator handy as well, especially if your job is in any way related to sales.

What states don’t have sales tax?

In general, you’re responsible for collecting sales tax as the vendor or retailer and remitting it to your state’s department of revenue. In the event you’re selling at a physical location in another state, you have to collect sales taxes for that state and remit them to that state’s department of revenue. Always check state rules and regulations prior to collecting and remitting sales Small Business Bookkeeping Basics tax prior to making your first sale in order to be in compliance. If your business doesn’t have a physical presence in other states, you generally don’t need to charge taxes for out-of-state transactions. But if you have an economic nexus in another state, this means you are a remote seller. When you sell to that state, you charge tax rates at the place where your product is going.