How sales tax works

Adding sales tax

Multiply the amount before tax by the combined rate and add the result. For example, 1,000 at 8% gives 80 of tax and a total of 1,080.

Removing sales tax is a division

To take sales tax out of a total, divide by 1 plus the combined rate. Say a 1,080 total includes 8% tax. The amount before tax is 1,080 ÷ 1.08 = 1,000, and the tax is the 80 left over.

Subtracting 8% from 1,080 gives 993.60 instead, which is out by 6.40. That 6.40 ends up counted as tax (86.40 instead of 80), so you'd remit more than you owe and record less income than you earned. I recommend doing the division every time you're handed a figure that already includes tax.

Why the rates are rows rather than one field

A combined rate is what you charge, and the separate rates are what you file. Say the state rate is 6.25%, the county 1% and the city 0.75%. Entered as three rows, they make the same 8% on the invoice, and they give you the breakdown a return asks for. Entering one combined rate produces the same total. I'd use the single rate when you don't need the split, because nothing is lost, and the rows when a return asks for each jurisdiction.

How the split is rounded

The tax is worked out once on the combined rate, then divided across the rows in proportion to their rates. 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 produces breakdowns that can be a cent out against the tax they are supposed to explain. Giving the remainder to the largest row rather than the first keeps the relative error smallest. However, it does mean one jurisdiction can be a cent out against a return worked out a different way. Where that matters, I recommend checking the figure your filing software produces.

Sales tax is not VAT

The arithmetic is the same, but the conventions are different. Sales tax is charged once, at the point of sale to the end customer, and it's normally quoted on top of the price. VAT is charged at every stage, with credit for the tax already paid, and it's commonly quoted inclusive. So the sums in this guide work for either, but what goes on the invoice differs, and so does what you are allowed to reclaim.