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
- 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
- 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
- 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
- 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.