How sales tax works

Adding sales tax

Multiply the amount before tax by the combined rate and add the result. At 8 per cent, 1,000 gives 80 of tax and a total of 1,080.

Removing sales tax is a division

Divide the tax-inclusive total by 1 plus the combined rate. A 1,080 total that includes 8 per cent gives 1,080 ÷ 1.08 = 1,000 before tax, and the tax is the 80 left over. Subtracting 8 per cent from 1,080 gives 993.60 instead, which is the wrong number by 6.40 and is wrong in your favour — the kind of error that surfaces at the point you cannot afford it, which is filing.

Why the rates are rows rather than one field

A combined rate is what you charge, and the separate rates are what you file. Entering 6.25 for the state, 1 for the county and 0.75 for the city is the same 8 per cent on the invoice, and it is the breakdown a return asks for. Entering one combined rate produces exactly the same total, so nothing is lost by doing that when you do not need the split.

How the split is rounded

The tax is worked out once on the combined rate, and then divided across the rows in proportion to them. Each row is rounded to the currency and the largest row absorbs whatever is left over, so the rows always sum to the tax figure they came from.

Rounding each row on its own would be the obvious way, and it produces breakdowns that are out by a cent against the tax they are supposed to explain. Giving the remainder to the largest row rather than the first keeps the relative error smallest, but it does mean one jurisdiction can be a cent out against a return worked out a different way. Where that matters, check the figure your filing software produces.

Sales tax is not VAT

Sales tax is charged once, at the point of sale to the end customer, and it is normally quoted exclusive of the price. VAT is charged at every stage with credit for the tax already paid, and it is commonly quoted inclusive. The same arithmetic works for either, but the invoice conventions differ, and so does what you are allowed to reclaim.