Have you ever wondered how to calculate sales tax? It’s easy to feel overwhelmed — after all, it has a direct impact on our lives and can vary a lot depending on several factors.
Say you go to a store to buy a bottle of soda. You look at the price tag and it says $ 2.50. However, when you get to the checkout, you end up paying a little more than that. How can you know exactly how much you will end up paying?
The price you pay for a product includes a percentage related to its sales tax, which doesn’t go to the seller but instead it goes to the government. This also applies to several other categories of goods, depending on your country and state.
Because of such variations, it might be hard to understand how sales taxes work and how to calculate them.
However, there are ways to make them more tangible so that your finances don’t get out of hand. Check out the answers to most of the questions related to this subject.
What are Sales Taxes?
Sales taxes are a kind of tax applied to the sale of certain products and services in the United States, Canada, and other countries.
It’s a mandatory tax paid directly by the consumer when purchasing these goods and it corresponds to a percentage of the price.
Different states and countries deal differently with sales taxes but the same concept applies everywhere: they are based on the actual price of products and collected by the sellers.
Such value is represented by a percentage. If a product has a sales tax of 9.45%, it means that 9.45% of its value consists of a sales tax while the remainder is directly passed to the seller. This information is usually shown on purchase receipts.
In addition, not all kinds of products have sales taxes. In fact, each business is required to follow a list of goods that are taxable in order to stick to the law. For example, in most places, dietary foods and health supplements are exempt from tax.
Do Sales Taxes Go to the Federal Government, States, or Cities?
In the United States, all sales taxes are regulated by the states. This means that the states are the ones that collect sales taxes, not the federal government.
Since each state deal with its own sales taxes, it also means that they are the ones that set those values.
So, for instance, as of 2020, the sales tax in Texas is 8.19% while Kentucky’s is 6%. Because of this, businesses that operate country-wide end up having to deal with multiple sales taxes depending on where purchases are being made.
However, some cities have the autonomy to regulate sales taxes in states that are exempt from them. You can learn more about this in the answer to the following question.
Which States do not Have Sales Taxes?
As you have already learned, it’s not the federal government that sets sales taxes. Instead, this is controlled and collected by each individual state.
Even though the states are the ones that regulate sales taxes, there are also those that simply do not have them.
These are the 5 US states without a statewide sales tax:
- Alaska (though some cities are allowed to impose local sales taxes)
- Oregon
- Montana (also allows local sales taxes on certain cities)
- New Hampshire
- Delaware
In the case of Delaware, it’s important to note that, while the state has no sales taxes, it does impose a gross receipts tax. Unlike regular sales taxes, it’s not paid by the consumer but is instead being directed to the businesses. As of 2020, this tax ranges from 0.09% to 0.7%.
Do Businesses Need to Charge Sales Tax?
Since sales tax is determined by state (and sometimes city), whether or not you as a business owner need to be charging it (and on what) depends mainly on where you live.
But it’s essential that all business owners know the law and follow it to the letter.
That said, every business owner should thoroughly research sales tax law where they live and learn how to calculate sales tax correctly.
Here’s a look at how to determine which of your goods and services need to be taxed if you don’t happen to live in one of the few states that don’t charge sales tax at all.
Physical Products
If your business sells physical goods of any kind and you do not live in Alaska, Delaware, Montana, Oregon, or New Hampshire, you likely need to be charging sales tax on all or most of your products.
Every state has its own running list of taxable goods, so you need to know what those are for your location. However, there are common exceptions, including:
- Prescription drugs.
- Food, especially any meant to be prepared at home.
- Agricultural items (like animal feed or crop seeds).
- Raw materials and other items meant for resale.
Services
For a long time, sales tax did not apply to anything other than physical goods, but that’s no longer the case.
New Mexico, South Dakota, West Virginia, and Hawaii already require sales tax to be charged on services by default.
But if you don’t live in one of those states (or any of the five that don’t charge sales tax), you need to know which types of services are taxable in your state and according to which protocol.
For example, a given state may require tax to be charged differently on mechanical or landscaping services than they do on legal services or recreational experiences.
Many religious organizations and charities are tax-exempt.
Digital Goods
Since digital goods haven’t been around as long as traditional products and services, most state sales tax laws are still evolving.
However, it again depends on the state and the type of digital goods being sold.
Some states treat digital products exactly the same as they do physical products, while others may tax software and not other digital products (or vice versa).
You should always be aware of current laws in your area, but a state-by-state overview can help you determine where you stand in advance.
How to Calculate Sales Tax?
Knowing how to calculate sales tax isn’t just something business owners should be concerned about. It can be very helpful to consumers to know in advance how much they can expect to pay for the things they need.
Again, you’ll need to know the going sales tax rate in your state or area and whether what you’re buying is taxable by law.
States charge a certain percentage of the cost of your product or service as sales tax, so you can determine what that amount will be by calculating that percentage of a product’s price.
Add that amount to the product’s price (plus any additional fees that may apply), and you’ve got the item’s true cost.
The formula that’s used to calculate sales tax is pretty simple:
Price of the product + Sales tax rate (%) of the state/city
Let’s go back to the bottle of soda example. It costs $ 2.50. Imagine you live in Arkansas, which is a state that charges a sales tax of 9.47% as of 2020. Considering 9.47% of $ 2.50 equals 0.23675, so all we need to do is add that to the original $ 2.50 and round it up. The total is $ 2.74.
As it’s a percentage growth, the difference becomes more noticeable as your purchase gets more expensive. Imagine you’re buying a video game console that costs $ 300 under the same sales tax as the last example. The total will then become $ 328.41.
You can also use a handy resource like a sales tax calculator to make things easier if you wish.
What is a Sales Tax Calculator and What Does it Do?
The role of a sales tax calculator is to provide you with the real value you will pay at checkout based on the product’s price and the sales tax for your state or city. It’s supposed to do all the math for you in an easy and fast way.
There are several types of sales tax calculators available, most of these being mobile and web apps. The most useful ones are those that don’t require any software installation by the user, such as the ones made by using ION.
In fact, there’s a whole section on ION related to pre-built calculator templates that can be used to add up all kinds of information. Calculating sales tax is only one of the possible solution finders for sales enablement.
Businesses that are investing in interactive content are able to provide solutions like these and positively affect their target audiences. Those provide a lot of value to people looking to learn how to calculate sales tax and figure out several other complex problems.
How to Calculate Sales Tax for Your Business
Now that you understand a bit about how sales tax works, as well as how to calculate sales tax, in general, it’s time to look at how to practically apply what you know to your business function.
Here’s a breakdown of how that works.
1. Determine which customers you should charge
In an internet-reliant world where many businesses sell online to people who may live in other states, it’s important to know who should be charged.
Generally speaking, you must charge sales tax in any state where you have sales tax nexus.
To have sales tax nexus in a state is to have a significant business presence there. You will always have this in your own state.
However, you may also have sales tax nexus in other states if you have a location there, sell at a trade show there, or have personnel located there.
2. Get clear on how much sales tax to charge
Remember, how much sales tax you need to charge varies according to where exactly you live and what you sell, so it’s crucial that you stay informed as to your local sales tax laws.
Things may be slightly different in your city or county than in the rest of the state.
Either way, if you sell physical goods or taxable services to people within your home state, figuring things out is pretty simple. But if you’re shipping goods to someone out of state, you may well be required to charge tax according to their state’s laws instead of your own.
3. Register for a state tax permit
Once you’ve figured out where you’re considered to have sales tax nexus, you need to register for a sales tax permit (or sales tax license) in those states.
It’s important not to skip this step. You also need to make sure you do this before you actually start collecting sales tax.
It’s against the law in most states to collect state sales taxes without a proper permit on file.
4. Understand how to collect sales tax
Thankfully, collecting sales tax is relatively simple if you run a digital-age business online.
Many of today’s most popular online shopping cart options have built-in features that take care of this for you.
However, collecting tax via additional eCommerce platforms — like Amazon, Magento, Shopify, and eBay, to name just a few examples — is still relatively simple, especially if you leverage the right tools to help.
5. File your state sales taxes
When you filed for your tax license, the applicable state will have assigned you both an ID number and a filing frequency.
Your assigned frequency could be monthly, annually, quarterly, or something else entirely. (Different states where you have sales tax nexus may also set different frequencies.)
You will likely also need to break down the amounts of tax you’ve collected according to city, county, region, and so forth, so know what the state protocol is and be prepared.
When you’re ready, you can file state sales taxes online, by mail, or over the phone in most cases.
Be sure to file even if you didn’t actually collect taxes during a given period, as this is necessary to maintain your tax license.
Wrap Up
As you can see, learning how to calculate sales tax isn’t necessarily hard, just cumbersome.
Like with many other aspects of daily life, it’s best if we can automate this process and figure out the real price we will pay at the checkout by using an interactive calculator. The power of interactive marketing is able to bring plenty of convenience to all kinds of people, including you.
Would you like to learn more about interactive content?
Check out more information on what interactive calculators are here on our blog.
