How To Calculate Sales Tax: A Step-by-Step Guide

Jen Pedrozo
courtneyk / Getty Images
courtneyk / Getty Images

Knowing how to calculate sales tax is important, especially if you’re saving up for a large purchase. To calculate sales tax, multiply the total cost of the product by the sales tax rate levied in your area.

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Sales Tax Formula and Example Sales Tax Calculations

Here’s how to calculate how much you’ll pay in sales tax on a product.

Use the following sales tax formula: sales tax = list price x sales tax rate (as a decimal)

For example, Sarah is purchasing a refrigerator. The refrigerator is on sale for $1,200 and her sales tax rate is 6%. 1,200 multiplied by 0.06 is 72, so Sarah would pay $72 in sales tax. This would bring her total bill to $1,272.

What Is Sales Tax?

Sales tax is a tax paid on goods and services. The purchaser pays the tax to the retailer, who then relays it to the state and local governments. It accounts for 32% of all state taxes and 13% of all local taxes collected.

Sales tax is levied on nearly all goods and services. Some states exempt sales on products like groceries or other food not consumed on-site and any products or services sold business-to-business.

In most cases, the sales tax rate you pay is a composite of state and local rates.For example, the total sales tax rate in Franklin County, Ohio is 7.5%. Since Ohio’s state sales tax rate is 5.75%, the local sales tax rate for Franklin County is 1.75%.

Revenue generated by sales taxes often funds state and local programs such as education, infrastructure and other general purpose projects.

States That Don’t Charge Sales Tax

Delaware, New Hampshire, Montana and Oregon do not charge sales tax. Alaska does not charge a state sales tax but does allow local communities to leverage a local sales tax.

Some states may offer sales tax holidays throughout the year to minimize the burden on necessary purchases like school or disaster preparation supplies.

States With the Highest and Lowest Sales Tax Rates

The average sales tax rate in the United States is 6.6%.

The states with the highest average sales taxes are:

  • Louisiana: 9.56%

  • Tennessee: 9.55%

  • Arkansas: 9.45%

  • Washington: 9.38%

  • Alabama: 9.29%

The states with the lowest average sales taxes are:

  • Alaska: 1.82%

  • Hawaii: 4.5%

  • Wyoming: 5.44%

  • Maine: 5.5%

  • Wisconsin: 5.7%

How Do You Calculate Sales Tax Backwards From a Total?

When you aren’t sure what sales tax you paid, check your receipt — the rate and total in dollars are often included there.

If it isn’t, you can work backward to determine your sales tax by subtracting the purchase price from the total you paid at the register. For example, if Michael bought a new dog toy that cost $5, but he paid $5.30 at the register, he paid $0.30 in sales tax.

To determine the sales tax rate, divide the total sales tax paid by the product price. In this case, Michael would divide $5 by $0.30 to get 0.06, which means he paid a 6% sales tax.

Final Take

Sales taxes are an important part of state and local revenue streams. Since the tax is added to your purchases, knowing how to calculate sales tax can ensure you have enough to cover your bill, especially if you are making large purchases like a car or home appliance.

FAQ

Here are more answers to other commonly asked questions about sales taxes.

  • Can you write off sales taxes on your federal taxes?

    • The IRS allows you to write off your state and local sales tax as long as you do not also write-off your state and local income taxes. This is one of many tax write-offs a person can claim to lower their taxable income and potentially lower their IRS tax bracket.

  • What type of tax is a sale tax?

    • A sales tax is a consumption tax because it is levied on people when they make a purchase rather than deducted from their paycheck, like the Social Security and Medicare tax Other consumption taxes include valued-added taxes and excise taxes.

  • Is sales tax included in the cost of a capital asset?

    • The acquisition basis of a capital asset is its cost to you, so you can include sales tax in that total. This can be helpful when determining whether you have a capital gain or loss, as raising the acquisition basis can lower the amount you earned if you sold it at a profit, thereby lowering the capital gains taxes you'll pay.

  • Where is my tax return?

    • How long a tax refund takes depends on how you filed. Electronic filers receive their refund in about three weeks, while mail-in filers receive it in about a month.

This article originally appeared on GOBankingRates.com: How To Calculate Sales Tax: A Step-by-Step Guide

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