How to Calculate Sales Tax

Fact checked by Vikki VelasquezReviewed by Khadija KhartitFact checked by Vikki VelasquezReviewed by Khadija Khartit

Sales tax is a percentage of a retail price. To calculate it, convert the state sales tax percentage to a decimal, then multiply it by the retail price of the product or service.

For example, let’s say Kwame is purchasing a laptop for $1,200 in California, where the sales tax rate is 7.25%. Here’s what that calculation would look like:

• 7.25 ÷ 100 = 0.0725
• 0.0725 × $1,200 = $87

The sales tax would be $87. This amount would need to be added to the original price of the laptop. The final price of the laptop would be $1,287.

Key Takeaways

• Consumers pay a percentage-based sales tax at the point of purchase of many goods and services, though exemptions exist for certain categories, differing by state.
• Sales tax is imposed at the state level and provides revenue for the government. 
• Sales tax can be calculated by converting the sales tax percentage to a decimal, then multiplying it by the retail price of a good or service. 

Sales Tax Calculation and Formula

Calculating sales tax is simple as long as you understand state sales tax rates and collection requirements in the state(s) where the transactions are taking place.

Here’s how to calculate the sales tax on an item or service:

• Know the retail price and the sales tax percentage.
• Divide the sales tax percentage by 100 to get a decimal.
• Multiply the retail price by the decimal to calculate the sales tax amount.

Expressed as a formula, the calculation is:

(Sales tax percentage ÷ 100) × price of good or service

The final price of the item is the amount of tax plus the original price of the item before tax.

35

The number of states, plus the District of Columbia, that have a sales tax of 5% or higher.

How State Tax is Determined

Sales taxes are administered at the state level, but they can be levied at the municipal or county level as well. Alaska, for example, has no state sales tax, but many municipalities within Alaska levy sales taxes that range from 1% to 7%.

Not all states have a sales tax. Besides Alaska, Delaware, Montana, New Hampshire, and Oregon do not levy any state sales taxes. The sales tax rate in the United States ranges from 0% in the aforementioned states to 7.25% in California, with Indiana, Mississippi, Rhode Island, and Tennessee following closely at 7%.

Sales tax does not apply to all goods and services; most states have exemptions on certain categories, such as food, clothing, medicine, newspapers, and utilities. The exemption categories vary by state.

Another consideration is that sales tax may be charged for online sales, depending on whether the seller is considered to have nexus in a state. Generally, for tax purposes, nexus is understood to mean a physical presence, such as a warehouse, office, or employee who resides in the state.

However, this definition comes into tension with the presence of mass ecommerce retailers, such as Amazon. In an attempt to capture tax on online sales, several states have passed “Amazon laws,” which have shifted the definition of nexus.

What that means is that although online sellers such as Amazon may not have a physical presence in a given state, they may be recognized as having a “constitutionally significant connection” to that state and are therefore required to pay sales tax in certain states.

How Do You Calculate Sales Tax?

Let’s say Emilia is buying a chair for $75 in Wisconsin, where the tax rate is 5%. Here’s how the tax would be calculated:

• 5 ÷ 100 = 0.05 
• 0.05 × $75 = $3.75

The amount of sales tax that would apply to Emilia’s purchase of this chair is $3.75. Once the tax is added to the original price of the chair, the final price including tax would be $78.75. 

What States Don’t Have Sales Tax?

Delaware, Montana, New Hampshire, and Oregon do not have any state sales taxes. Alaska doesn’t levy state sales taxes, either, but the state allows cities and counties to charge their own taxes.

What States Have the Highest and the Lowest Sales Tax?

The highest sales tax rate is California’s, at 7.25%. The second highest rate, found in Indiana, Mississippi, Rhode Island, and Tennessee, is 7%.

Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose any sales tax. (However, additional taxes may be charged in local and municipal jurisdictions within Alaska.)

What is Nexus?

In the context of sales tax, the term “nexus” refers to the presence of a business in a state. Traditionally, this has meant a physical presence (for example, a warehouse, an office building, or an employee) in a given state; however, in some states, legislation related to ecommerce has shifted the definition to encompass a “constitutionally significant connection” (not necessarily physical) with the state.

What is Value-Added Tax?

Value-added tax (VAT) systems levy consumption taxes on goods and services at every stage of the supply chain where value is added. Unlike a conventional sales tax, which is usually charged as a percentage of a retail purchase, a value-added tax is calculated according to the cost of a product minus the costs of materials in the product that have previously been taxed.

The Bottom Line

Sales tax is a simple calculation based on the percentage of a retail price of a good or service. To calculate it, convert the sales tax percentage to a decimal, then multiply it by the retail price of the product or service. For example, in a state with a sales tax percentage of 5%, the sales tax on a $10 item would be $.50. (It’s .05 * $10.)

Read the original article on Investopedia.