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Computing the Tax

Regardless of the type of sales tax with which you're dealing, the amount of tax that is owed with respect to each taxable sale comes down to applying the applicable tax rate to the total sales price. That is, the tax generally applies to the total amount that was received for the property or service, without any deductions for the cost of the property or service that was sold or any materials that may have been used, labor or service costs, or other expenses. In other words, the tax base doesn't necessarily bear any relation to the actual profit the seller may have realized on the sale.

The tax computation may be complicated by the fact that not all states have a single sales tax rate. Rather, many states have both a general rate and one or more special rates that apply to specific types of sales. Adding to the problem is that most states have local jurisdictions that impose their own sales taxes.

The following are some of the items that may affect the tax base:

  • Cash or trade discounts — as a general rule, discounts that are known and taken at the time of sale are excluded from the tax base. However, the states are split as to whether a discount that is taken after the sale, such as a prompt payment trade discount, may reduce the tax base.
  • Coupons and rebates — manufacturers' coupons that are used to reduce the amount of cash a purchaser tenders generally will not reduce the tax base, because the retail seller can return the redeemed coupons to the manufacturer for credits. A similar rule applies with respect to manufacturers' rebates. In contrast, a purchaser's redemption of coupons that the retail seller issued generally are treated the same as cash discounts.
  • Trade-ins — most states allow the tax base to be reduced by the value of any property that is taken in trade for the item that is sold. Other states allow the exclusion only with respect to trade-ins of specified vehicles and similar items, while some states don't allow any exclusion for trade-ins.
  • Transportation charges — generally, separately stated charges for transportation that occurs after the sale are excluded from the tax base. However, some states look to the f.o.b. (free of board or freight on board) point to determine whether the charges are taxable. In these states, transportation charges are taxable if property is sold f.o.b. destination, but not if the property is sold f.o.b. origin (and the charges are separately stated).
  • Post-sale labor and service costs — although most states specify that "labor and service" costs are included in the tax base, if the costs are incurred after the sale is completed and are separately stated they generally may be excluded. Of course, the key issue here is determining when a sale is "completed." For example, if you sell a satellite dish that can't be used until you install and configure it, your charges for such services will likely be included as part of the sale even if they are separately stated.
  • Returns — most states allow a deduction from the tax base when merchandise is returned. However, the deduction may be limited if the full purchase price is not refunded or credited to the customer (due to a restocking charge, for example).
  • Bad debts — most states allow bad debts to reduce the tax base for the reporting period that the debt is deducted for income tax purposes. Other states allow a credit equal to the tax that was initially paid in connection with the sale to which the debt related.