Knowing how to calculate sales tax is an important part of running a business. Whether you own a restaurant, retail shop, salon, or another brick-and-mortar business, sales tax affects what customers pay at checkout and how much money you need to hold for your tax filing deadline.
The basic sales tax formula is simple: multiply the taxable sale amount by the sales tax rate. But in practice, the correct rate can depend on where your business is located, where the sale happens, what you sell, and whether state or local taxes apply.
Here’s how to calculate sales tax, how to add sales tax to a price, and what to keep in mind after the sale is complete.
How to figure out sales tax
To calculate sales tax, multiply the taxable sale amount by the sales tax rate expressed as a decimal.
Sales tax formula:
Taxable sale amount × Sales tax rate = Sales tax amount
For example, if a taxable item costs $100 and the sales tax rate is 6%, the sales tax is $6.
$100 × 0.06 = $6
The customer’s total would be:
$100 + $6 = $106
How to add sales tax to a price
To add sales tax to a price, calculate the sales tax amount first, then add it to the original price.
Formula for adding sales tax:
Original price + Sales tax amount = Total price
For example, if a customer buys a $50 item and the sales tax rate is 7%, the sales tax amount is $3.50.
$50 × 0.07 = $3.50
Then add the tax to the original price:
$50 + $3.50 = $53.50
The customer’s total is $53.50.
Before you calculate sales tax, convert the percentage rate into a decimal. To do that, move the decimal point two places to the left. For example:
- 5% becomes 0.05
- 6.5% becomes 0.065
- 7.25% becomes 0.0725
- 8.875% becomes 0.08875
Once the rate is in decimal form, multiply it by the taxable sale amount.
How to calculate total sales tax with state and local rates
In many areas, the total sales tax rate includes more than one rate. A business may need to collect a state rate plus local city, county, district, or other local taxes. Because sales tax varies by state, businesses should confirm which rates and rules apply where they sell.
For example:
- State sales tax rate: 6%
- Local sales tax rate: 1%
Before calculating the sales tax amount, add the state and local rates together. In this example, 6% plus 1% gives you a total sales tax rate of 7%.
If the taxable sale amount is $200, the sales tax calculation would be:
$200 × 0.07 = $14
The customer’s total would be:
$200 + $14 = $214
What counts as the taxable sale amount?
The taxable sale amount is the portion of the sale to which sales tax applies. In many cases, this is the price of the taxable goods or services after any applicable adjustments.
However, taxability can vary by state, location, product type, and service type. Depending on where your business operates, sales tax rules may treat certain items differently, including:
- Food and beverages
- Clothing
- Digital products
- Services
- Shipping or delivery charges
- Discounts, coupons, or promotions
For example, a grocery item, a prepared food item, and a retail product may not all be taxed the same way. A salon service, repair service, or installation service may also be taxable in some states but not others.
If you are unsure whether a product or service is taxable, check with your state tax authority or a qualified tax professional.
How to calculate sales tax on a discounted item
If a customer receives a discount, the taxable sale amount may be the discounted price. However, rules can vary by state and by the type of discount, coupon, or promotion.
For example, if a $100 item is discounted to $80 and the sales tax rate is 6%, the sales tax calculation may be:
$80 × 0.06 = $4.80
The customer’s total would be:
$80 + $4.80 = $84.80
Because discounts and coupons are not treated the same way in every state, businesses should confirm how discounted sales should be handled in their jurisdiction.
How to calculate sales tax from a total
Sometimes a business may need to determine how much sales tax is included in a total price. This is different from adding tax to a subtotal.
If sales tax has already been added, use this formula:
Total price ÷ (1 + sales tax rate) = Pre-tax price
Then subtract the pre-tax price from the total price to find the sales tax amount.
For example, if the total price is $107 and the sales tax rate is 7%:
$107 ÷ 1.07 = $100
Then subtract:
$107 – $100 = $7
The sales tax amount is $7.
If you already have the final total and need to find the pre-tax amount, DAVO by Avalara’s reverse sales tax calculator can help you back out the tax from a tax-included price.
Make your sales tax less taxing with DAVO.
Why accurate sales tax calculation matters
Calculating sales tax correctly helps businesses collect the right amount from customers and avoid surprises when it is time to file.
If a business undercollects sales tax, it may still be responsible for paying the difference. If a business overcollects, it may create customer service issues or require corrections later. Accurate sales tax calculation can also help businesses:
- Keep checkout totals consistent
- Maintain cleaner POS records
- Prepare more accurate sales tax reports
- Reduce the risk of filing errors
- Avoid using collected sales tax for everyday expenses
Sales tax is money collected from customers and paid to the appropriate tax authority. Keeping those funds separate from general operating funds can make it easier to file and pay on time.
Common sales tax calculation mistakes
Even when the basic formula is simple, sales tax errors can happen. Common mistakes include:
- Using the wrong local rate
- Forgetting to update rates when they change
- Applying tax to exempt items
- Failing to tax items that are taxable
- Using the wrong rate for different business locations
- Misunderstanding how discounts affect taxable sales
- Treating collected sales tax like regular revenue
For businesses with frequent daily sales, small errors can add up quickly. A POS system can help calculate sales tax at checkout, but businesses still need to make sure their tax settings are accurate.
How POS systems help calculate sales tax
Many POS systems allow businesses to set tax rates, assign taxes to products or services, and calculate sales tax automatically at checkout. Depending on the system, businesses may be able to create default tax rates, apply item-level tax settings, manage multiple locations, and generate sales tax reports.
However, a POS system does not remove the need to review sales tax settings. Businesses should check their rates and product taxability regularly, especially when they add new items, open new locations, or learn about rate changes.
Calculating sales tax is only the first step
Knowing how to calculate sales tax helps you charge customers correctly, but sales tax management continues after checkout. After sales tax is collected, businesses still need to keep those funds available, file returns, and pay the correct tax authority on time.
That can be difficult for small businesses that are already managing inventory, staffing, customer service, payroll, and day-to-day operations.
Make sales tax management easier with DAVO
DAVO helps automate sales tax preparation, filing, and remitting for small businesses by connecting with your POS system. After a simple one-time setup, DAVO sets aside collected sales tax daily into a separate secure account, then files and pays sales tax on your assigned filing schedule.
That means your sales tax is separated from your general operating funds before it can accidentally be spent. DAVO also offers a filing guarantee, giving businesses added confidence that their sales tax is handled accurately and on time.
Ready to spend less time managing sales tax? Learn more about DAVO today.
