Mounting up to $411 billion, sales tax is imposed on the services and goods consumed by consumers and is calculated as a percentage of the retail price to be paid by the end customer. This is why it’s crucial for you as a customer to know how much an item is going to cost before you make an order or head to the cashier at the store. 

Sales tax varies by state, but you won't have to pay the sales tax if you live in Delaware, Oregon, New Hampshire, Alaska, or Montana. In any other state, the total sales tax is between 4% to 9% of the retail price of the service or product you’ve bought. 

In this article, you’ll learn how to calculate sales tax, so you can determine how much you’re paying whether you’re shopping online, at a brick and mortar store, or paying for food at a restaurant. So, keep on reading.

E-Commerce Business Coaching & Mentoring 

E-Commerce Business Coaching &amp; Mentoring

Empty

Sales tax is mandatory if you live in a state or city that imposes it. The government takes this money to pay for road repairs, education, and public health care. But before determining the amount of sales tax you have to pay, there are a few questions that you need to answer. 

A single state will have different sales tax rates based on the item bought. For example, The District of Columbia has a general sales rate of 6% but charges a rate of 10% on liquor. 

In other states like Massachusetts, you can buy clothes without paying any sales tax as long as the bill doesn’t exceed $175. You will only pay the sales tax when you buy clothes that cost more than $175. 

Calculating the sales tax for national retailers like Amazon can be a little bit more complicated. For example, the sales tax rate you pay is determined based on a number of factors like the identity of the seller, nature of the product, location of fulfillment, and the delivery address of the order. 

You don’t have to pay for the sales tax unless you live in a state that imposes it. So, if you’re shopping in one of the states that don’t impose the sales tax, you can only pay the retail price. 

You can also avoid paying the sales tax by shopping on a tax holiday. A tax holiday is a temporary period where the government reduces or removes the tax imposed on a specific item or service in order to encourage spending. The government does this before several occasions like the back-to-school occasion or before a holiday, so people can buy everything they need. 

A tax holiday can be applicable on some items, typically life essentials, to reduce the burden on families and individuals. This tax holiday can also help businesses grow as they’re able to sell their products and services to more people. The Federation of Tax Administrators issues a calendar to keep people updated with the expected tax holidays to plan their spending ahead. 

State and local sales tax are both combined unless you’re buying products and services in one of the states where the sales tax isn’t mandatory. In some cases, local taxes can be as much or even higher than state sales tax. 

Although no state has changed the sales tax since April 2019, some states charge higher rates than the rest. For example, Tennessee has the highest combined sales tax rate of 9.55% in 2021, which is a combination of the state sales tax of 7% and the local sales tax of 2.55%.

How to Calculate Sales Tax

There are two ways to calculate the sales tax before buying an item or service. You can either start by adding the sales tax to the original cost of the item you’re buying or work backward if you know the total cost of the item and need to calculate the sales tax imposed. 

Every state doesn’t impose a sales tax on every item. For example, food that is used for home preparation and consumption and prescription medications aren’t taxable. However, food bought at a restaurant is often taxable in most states. 

If you know the sales tax imposed on the service or product, you can calculate the final price according to this equation. 

Service or Item Cost X Sales Tax = Total Sales Tax

Service or Item Cost + Total Sales Tax = Final Price of Service or Item

The sales tax is a percentage, and you can change it into a decimal form to calculate the total tax amount.

For example, if your item costs $100 and the sales tax is 4%, then you can calculate the final price of the service or item. 

If you know the final price of the service or item and the original cost price, you can work backward to find the sales tax rate. You will start by subtracting the cost price from the final price to find the added amount, which is the sales tax. Then you can find its rate by dividing it by the final price. This is the formula you need to follow. 

Final Price – Cost Price = Sales Tax Amount

Sales Tax Amount / Final Price = Sales Tax Rate

For example, if you buy a laptop that costs $1000 and you end up paying $1050, you can calculate the sales tax like this. 

Calculating my Sales Tax

Calculating the sales tax will help you determine the amount of money you will eventually pay for your product or service. The sales tax is calculated at the state and city level, and both should be combined when you’re shopping for a service or product. At the same time, there are some instances where you don’t pay for the sales tax because of an occasional tax holiday or because you live in a state that doesn’t impose a sales tax on the item you bought.

How to Calculate Sales Tax

How to Calculate Sales Tax

Calculating my Sales Tax

Wrap Up

Related Articles: