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Sales tax added to an invoice, taken back out of a price that includes it, taxable sales told from exempt ones, a monthly return split into its state and local shares, and the tax in the account kept apart as money owed.
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You will add sales tax to an invoice, take it back out of a price that includes it, tell taxable sales from exempt ones, fill in a monthly return with its state and local shares, and set the tax aside as money owed.
You can keep a cash book, write an invoice, and count revenue in the month the work was done. A tax on sales adds one more line to every invoice and one more bill to the forecast: money collected from customers that belongs to the state.
| Term | What it means |
|---|---|
| Sales tax | A tax on the final sale of goods, and some services, to the person who uses them, added at the register or on the invoice. |
| Sales tax permit | The state registration that lets, and requires, a business to collect sales tax. |
| Combined rate | The state rate plus any city, county and district rates where the sale takes place. |
| Resale certificate | A form a buyer gives to show it is buying to resell, so no tax is charged on that sale. |
| Exempt sale | A sale that carries no sales tax, such as groceries in many states or goods bought for resale. |
| Use tax | Tax a business owes on taxable items it bought for its own use without paying sales tax. |
In the United States sales tax is set by the states, and by cities, counties and districts within them; there is no national sales tax. Texas is a clear example. Its Comptroller of Public Accounts sets a state rate of 6.25 percent, and local governments may add up to 2 percent more, so the combined rate in most Texas cities is 8.25 percent. A business that sells taxable goods or services in Texas must hold a sales tax permit before its first sale, collect the tax, and send it to the Comptroller with a return.
An invoice for work worth 400 before tax, in a Texas city at 8.25 percent, shows three figures:
| Line | Amount |
|---|---|
| Total before tax | 400.00 |
| Sales tax at 8.25 percent | 33.00 |
| Total due | 433.00 |
The customer pays 433. The business's revenue is 400; the 33 is the state's and the city's, collected on their behalf.
Going the other way needs care. A payment of 216.50 that already includes the tax is not 216.50 less 8.25 percent. The tax was 8.25 percent of the price before tax, so the gross is 1.0825 times the net, and the net is
$$\text{net} = \frac{\text{gross}}{1 + \text{rate}} = \frac{216.50}{1.0825} = 200$$
and the tax inside is 16.50. Taking 8.25 percent of 216.50 overstates it, because it takes the rate of the wrong figure.
Every other rate in the practice that follows is the example's own; a real business reads its rates from its own state for the address of the sale.
Another way: steps
On an invoice or at the register. Price each line before tax, total the taxable lines, apply the combined rate, and add. Show the tax as its own line: customers, and the state, need to see what was collected.
Reversing a tax-included figure. Some businesses — food trucks at festivals, event stalls — price with tax included for round numbers. Divide the takings by one plus the rate for the revenue; the tax inside is the takings less that.
On the return. Add up the month's sales, take off the exempt ones — sales for resale backed by a certificate, exempt goods such as groceries in most states — and apply the rate to what is left. States with local rates ask for the sales by location so they can pass each city's and county's share on.
To check an invoice, divide the total due by one plus the rate: it must give the total before tax. To check a return, the tax collected in the cash book over the month should match the tax due on the return within a few cents of rounding; a larger gap means a sale was taxed at the wrong rate, or not taxed at all.
Sales tax is meant to be paid once, by the final user. That is why a wholesale bakery selling cakes to a café that gives it a resale certificate charges no tax: the café will collect it from its own customers. The certificate protects the seller, so it keeps every one on file; in an audit, a sale for resale without a certificate is treated as a taxable sale on which the seller failed to collect.
States also exempt some goods outright. Texas exempts most food bought to prepare at home, including bread sold without eating utensils, but taxes prepared food and food served to eat on the premises, so a café's hot sandwich is taxed and a loaf for the kitchen is not. Services vary even more from state to state. The state's own guides list what is taxable, and they are the only reliable source.
The mirror image is use tax. When a business buys something taxable for its own use — a laptop from an out-of-state seller, say — without paying sales tax, it owes the equivalent use tax to its own state, usually reported on the same return.
Each state sets its own rates, exemptions, filing schedules and registration rules, and publishes them through its revenue department — the Comptroller in Texas, the Department of Tax and Fee Administration in California, and so on. Five states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon, though some Alaska towns charge a local one.
Since the Supreme Court's 2018 decision in South Dakota v. Wayfair, a business that sells enough into another state online can owe that state's sales tax even with no shop there; each state sets its own threshold. A business selling across state lines checks each state's rule, often through the Streamlined Sales Tax project's shared guides or with software that looks up the rate for each delivery address.
The United States is unusual. Most other countries use a value-added tax (VAT), which is charged at every stage of supply rather than only at the final sale. A roaster charges a café tax on beans; the café charges its customers tax on coffee; and the café pays over only the difference — the tax on the value it added — because it claims back the tax it paid on the beans. The customer at the end bears the whole tax either way. A US business selling abroad meets VAT on its invoices; at home, it deals only with sales and use tax.
In the United States shelf prices are usually shown before tax, and the customer sees the tax added at the register. So a café that wants 3.00 of revenue from each coffee charges 3.00 and adds the tax; the customer pays 3.25 in a Texas city. A rise in the local rate raises what customers pay without changing the café's revenue. A business that chooses to price with tax included, for round numbers at an event, must remember that part of every round number is the state's, and that its own revenue falls a little whenever the rate rises.
Sales tax sits in the business's bank account for weeks before the return is due, and it looks exactly like the rest of the balance. A business that spends it runs short on the day the return is paid, and states charge penalties and interest on late payment; in many states, collected tax that is not paid over can become the personal debt of the owners who were responsible for paying it.
The simplest defense is to move the tax out of sight as it arrives: each week, transfer the tax collected to a separate savings account, and pay the return from there. The cash forecast should carry the return as a payment on its due date — in Texas, the 20th of the month after the period for monthly filers — and the monthly review should read the balance with the tax already taken out.
A bike repair shop in a Texas city collected 8.25 percent on everything it sold and filed its returns on time. In its third year the Comptroller's office audited it, and the owner learned two things.
First, about 11,000 dollars of parts sold to two other repair shops had been taxed, although the shops were buying to resell; the owner had overcharged them, and they were owed refunds of 907.50 between them. Second, and worse, 4,200 dollars of sales to a cycling club had been treated as exempt because the club said it was a nonprofit — but it had never given the shop an exemption certificate, so the shop owed the 346.50 of tax it had not collected, plus interest.
The fixes were simple. The shop now asks every business customer for a resale or exemption certificate before the first sale, keeps them in one folder, and marks the customer's record so the register does not charge tax. It also moves the tax collected each week into a separate account, so that when the return is due on the 20th, the money is already set aside.
Sales tax is one of the largest sources of revenue for most state governments, and the system relies on businesses collecting it correctly. Audits focus on exempt sales, because every exempt sale is tax the state did not receive; a certificate on file is what turns an exempt sale from a claim into evidence.
The tax collected is revenue. It is owed to the state.
To take 8.25 percent tax out of a price, take off 8.25 percent. Divide by 1.0825; the tax was a share of the smaller figure.
Every sale is taxed the same. Sales for resale and many groceries are exempt, and prepared food often is not.
A business with no shop in a state owes it nothing. Enough online sales into a state can create the duty to collect its tax.
Sales tax works the same everywhere. Each state sets its own rules, and most other countries use a value-added tax instead.
A resale certificate is a formality. It is the seller's only proof that an untaxed sale was allowed; without one on file, the seller owes the tax itself.
Price the repairs.
$4 \times 60 = 240$
Four repairs before tax.
Add the call-out fee.
$240 + 60 = 300$
The total before tax.
Work the tax at 8.25 percent.
$300 \times 0.0825 = 24.75$
On the total before tax.
Add it for the amount due.
$300 + 24.75 = 324.75$
What the delivery firm pays.
Check by reversing.
$324.75 \div 1.0825 = 300$
Back to the total before tax.
Read the month's sales before tax.
$16000$
From the register reports.
Take off the exempt sales.
$16000 - 2000 = 14000$
Whole-bean coffee sold to take home.
Work the state's share.
$14000 \times 0.0625 = 875$
6.25 percent.
Work the local share.
$14000 \times 0.02 = 280$
The city's and district's 2 percent.
Add them for the tax due.
$875 + 280 = 1155$
8.25 percent of the taxable sales.
Check against the cash book.
$\text{tax collected} \approx 1155$
Within a few cents of rounding.
Read the month's sales.
$9000$
Salad, herbs and potted plants.
Take off sales to restaurants with resale certificates.
$9000 - 6500 = 2500$
The restaurants collect tax on their meals.
Take off exempt produce sold to shoppers to cook at home.
$2500 - 1700 = 800$
Food for home preparation is exempt.
Read what is left.
$800$
Potted herbs and plants, which are taxable.
Apply the combined rate.
$800 \times 0.0825 = 66$
The tax due.
File the certificates.
$\text{six restaurants' forms}$
Proof for the 6500.
Put the payment in the forecast.
$66 \text{ on the 20th}$
A bill the account must carry.
Work the tax.
$400 \times 0.0825 = 33$
The rate of the total before tax.
Add it for the total.
$400 + 33 = 433$
What the customer pays.
Reverse to check.
Fixit Mobile invoices a delivery firm for $2$ screen repairs at $40$ dollars each and a call-out fee of $20$, all before tax. In this example the combined sales tax rate where Dan works is $20$ percent. Fill in the invoice's totals, in dollars.
| Amount | |
|---|---|
| Repairs before tax | |
| Total before tax | |
| Sales tax | |
| Total due |
Complete the worked solution: a bakery in Austin, Texas, where the combined sales tax rate is 8.25 percent, sold $8000$ dollars of taxable goods in March, of which $800$ went to cafés that gave it resale certificates. Work out the tax it owes for the month.
Take the resale sales off the total.
$8000 - 800 =$ t
The cafés will collect tax when they resell.
Apply the combined rate.
$(\text{taxable}) \times 0.0825 =$ x
The tax collected from customers.
Split it into the state and local shares.
$6.25 \text{ percent state}; \ 2 \text{ percent local}$
The state passes the local share on to the city and district.
Keep the resale certificates on file.
$\text{proof the exempt sales were exempt}$
Without them the bakery owes the tax itself.
Note the date the return is due.
$\text{the 20th of the next month}$
A payment the cash forecast must carry.
At a street festival Corner Bean prices everything with tax included, and a catering customer pays $220$ dollars. In this example the combined sales tax rate is $10$ percent. How much of the payment is the café's revenue, before tax?
Answer:
A bakery in Texas makes four sales one morning, each worth about $60$ dollars. Which of them carries sales tax?
A print shop in a Texas city with the full 2 percent local rate sold $4600$ dollars of printing in June, of which $800$ went to customers who gave resale certificates. Fill in its return, in dollars.
| Amount | |
|---|---|
| Taxable sales | |
| State share, 6.25 percent | |
| Local share, 2 percent | |
| Total tax due |
A food truck prices its menu with tax included, and its takings for the month are $7665$ dollars. In this example the combined sales tax rate is $5$ percent. How much of the takings should be set aside for the state?
Answer:
A bookshop adds sales tax at the register to its shelf prices; in this example the combined rate where it trades is 8 percent. It sells $217$ books a month at $150$ dollars each on the shelf. Fill in its figures, in dollars.
| Amount | |
|---|---|
| Tax on one book | |
| Customer pays for one book | |
| Tax collected in the month | |
| Revenue for the month |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
In a month a florist sold $38000$ dollars of flowers before tax, of which $5600$ went to event planners who gave resale certificates. In this example the combined sales tax rate is 8 percent. How much sales tax does the florist owe for the month?
Answer:
You can charge, reverse and account for sales tax. Tell someone why 8.25 percent tax is not 8.25 percent of the price the customer paid. Next: the income tax to set aside and the deductions from a paycheck.
17. Your turn: work worth 400 before tax, at 8.25 percent, step 3
$433 \div 1.0825 = 400$
Back to the total before tax.