Sales Tax Formula and Calculation

Sales tax calculation is essential to financial transactions, whether you’re running a business or making personal purchases. Understanding how to calculate sales tax accurately is crucial to ensure proper budgeting and compliance with tax regulations. By utilizing a sales tax calculator and formula, individuals and businesses can swiftly determine the correct amount of sales tax to be paid, enabling them to make informed financial decisions and avoid any potential errors. This blog will delve into the fundamentals of sales tax calculation, explore the formula for determining sales tax, and provide practical examples to illustrate its application in various scenarios.  

Why do you need to calculate sales tax?

Before you start collecting sales tax from your customer, you must know how to calculate it. Since sales tax laws vary in all states, you might need help figuring out how much sales tax to collect from customers.

The states use the tax you collect for various projects of public interest. Learn more about what sales tax is used for in our earlier blog.

If you fail to collect the due amount from the customers, you must pay it out of pocket. So, it is crucial to determine the amount of sales tax you must collect as a business. 

You might not need to calculate and collect sales tax in the following conditions. 

• Your business is based in a state with no sales tax, or you don’t meet economic nexus in any other state.
• The product or service you offer is not taxable in that state
• You sell products to resellers (i.e., wholesalers or distributors)
• You sell products to tax-exempt organizations
• There is a sales tax holiday

 

How is sales tax determined?

The state government administers sales tax, but the local government also imposes its own sales tax in some states. Thirty-eight states impose local sales tax along with state sales tax. For example, Alaska has no statewide sales tax but imposes a local sales tax of up to 7%.

To get the combined sales tax rate for your calculation, you must add all sales tax rates for the state, county, and city if the location has local sales tax rates.

The sales tax rate is also given as a percentage, but converting the rate into a decimal format is easier for calculation purposes. To do this, you will need to remove the % and divide the sales tax rate by 100 and move the decimal two places to the left. For example, a 7% sales tax rate will be 0.07 in decimals.

Calculating sales tax doesn’t need to be stressful. The first step is to find the sales tax rates in your state. Once you know the sales tax rates, you can calculate how much to collect from customers.

 

Sales Tax Formula

Below is the formula to calculate the sales tax amount for purchasing any taxable item or service:

         

Sales Tax Amount = Price of item x [State sales tax rate in decimals + Local sales tax rate in decimals]

 

How to Calculate Sales Tax?

To calculate sales tax, follow these steps:

1. Determine the selling price of the item or service you intend to purchase. 
2. Add all sales tax rates applicable at the point of sale. Add all state, county, and city tax rates. See the sales tax rates in different states here. If you buy something online, your shipping address would be the location used for sales tax at the point of sale.
3. Convert the sales tax rate into decimal format. 
4. Calculate the sales tax amount using the formula mentioned above.
5. Add the sales tax amount to the selling price of the item or service. This amount is the total that the customer will pay for your item or service.

 

Example of how to calculate sales tax

Let’s walk through a real-life example of calculating the sales tax amount.

Kyle Cosmetics sells skincare products online to customers throughout the US. The business and all employees are located in California. All inventory is also stored in a warehouse in California. The business has no secondary location and only meets economic nexus requirements in Florida, which they already have a sales tax permit for.

                     

A customer purchases a Vitamin C serum for $28. The order is placed to be shipped to Miami, Florida.

           

As of February 2024, Florida’s current state sales tax rate is 6%, the county sales tax rate (Miami-Dade County) is 1%, and the city’s sales tax rate (Miami Beach) is 0%. Therefore, the combined sales tax rate for 3120 Collins Avenue, ZIP code 33140 in Florida is 7.00%.

• Let’s convert it into decimal format: 7% = 0.07.
• Now, let’s use the formula to calculate the sales tax amount.
• The price of the item x sales tax rate in decimals = Sales tax amount
• $28.00 x 0.07 = $1.96
• The sales tax amount that will need to be collected for this order is $1.96, as shown in the screenshot. This amount will need to be remitted to the state.
• To calculate the total cost before adding the shipping cost, you can add the sales tax amount to the item’s price:
• $28.00 + $1.96 = $29.96

Ecommerce platforms, such as Amazon and Shopify, can automatically calculate and collect the sales tax amounts from customers once additional steps are taken to configure your tax settings. As part of our all-inclusive, full-stack sales tax solution, TaxHero will help configure your tax settings in your ecommerce platforms to ensure you’re collecting the right amount for every order.

 

TaxHero Sales Tax Calculator

Use the TaxHero calculator for a straightforward way to apply the sales tax formula.

 

Need help calculating sales tax? Connect with TaxHero 

As an online business, calculating sales tax for every transaction and ensuring you get all sales tax due can get complicated. TaxHero offers an all-inclusive, full-stack sales tax solution to this by taking care of your sales tax calculation, collection, filling, and all other functions. Talk to our CEO to see how we can help transform your sales tax compliance.