Whether necessary, for pleasure or any other reason, shopping is part of our everyday life. When making any purchase in the United States, remember that in addition to its declared value, the buyer will also have to pay sales tax. The fee is not initially added to the price of the item and is collected by the seller at the time of final settlement, which is why you should double-check your final price before purchasing.
If the purchase is made at a brick-and-mortar store, funds go to the state of the physical location of the outlet. If the goods are ordered online, then the money will go to the state in which the person receives the package. The good news is that sales tax is only levied on new goods and services. If you buy a used item, you do not need to pay this tax. In this guide, we will explain in detail how sales tax works, as well as show you an example of how to calculate sales tax yourself.
Definition
Sales tax has an ancient history, with drawings of its collection dating from around 2000 BC to be found on the walls of ancient Egyptian tombs. Currently, this tax is usually set at the local or regional level, and the funds collected go to the corresponding budget.
Sales tax is one of the types of taxes that is withheld from the buyer directly when the buyer pays the seller for the goods or services, taking into account the established tax rate. Accordingly, the buyer will see the amount of tax they pay at the time of checkout or calculate it ahead of time, if desired. The seller is obliged to transfer it to the budget.
Like most taxes, it is usually expressed as a percentage of the price of the goods or services one is purchasing. Sales tax is usually levied on the sale of goods, but in many cases, it is also levied on the sale of services. Some goods and services may be exempt from this tax, according to federal and state legislation
When calculating the sales tax, you need to look up state and local tax rates, as they differ significantly from place to place. The amount of the tax may change from time to time, and also depends on the type of product (clothing, food, services, etc.). In addition to the state taxes, the buyer may additionally need to pay the local taxes established by the authorities.
In some states, tax deductions (including local taxes) exceed 10%. The highest rates are charged in Louisiana, Tennessee, Alabama, Arkansas, and Washington. However, depending on where you make a purchase, you might way a very low or even no sales tax for items you purchase. Currently, residents of New Hampshire, Montana, Delaware, Alaska, and Hawaii are among the lucky ones.
Calculation
Whether you are a customer who pays the tax and wants to know what the final price will add up to or the seller who needs to know how much to charge the buyer, knowing how to calculate sales tax is a valuable skill. Despite initially looking to be relatively hard to calculate, this simple guide on how to calculate sales tax will show you that you might even be able to do it in your head.
To find out the amount of tax that is added to the purchase receipt beforehand, you need to use a simple formula. Let’s use an example to guide you through the process. You’re interested, for instance, in the iPhone 11 Pro priced at $899. What will be the tax on it? Suppose you order your brand new iPhone 11 Pro in Texas, where the tax is 6.25%. In this case, the formula will be very simple:
$899 × 0.0625 = $56.19
As you have noticed, we first need to convert the rate from the percentage format into the decimal format. Now, let’s find out what the final price will. The final price of the iPhone will be the starting price of the phone plus sales tax.
$899 + $56.19 = $955.19
If you want to know just the final price, you can use another method to calculate it. To do this, you need to multiply the price of the phone by 1 plus the tax rate. Multiplying it by 1 will give you the initial price and multiplying it by the decimal tax rate will give you the amount of the sales tax you have to pay. Thus, our final price will be $899 x 1.0625 = $955.19. As you can see, both methods gave us the same final amount.