How to Calculate Sales Tax

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

When you purchase a good or service, you will pay an extra amount on top of your purchase known as a sales tax. In this lesson, you will learn how to calculate sales tax.

What Is Sales Tax?

Meet Melissa. She has been saving money to buy an outfit for the first day at her new job. She has heard of sales tax but she isn't quite sure how it works. Let's see if we can help Melissa calculate the sales tax on her purchase to ensure she has enough money to pay for it.

Sales tax is a mandatory amount that the government charges on items purchased by consumers and businesses. The government uses the money obtained from sales taxes for things such as education, health care, road repairs and transit. Individual stores collect the sales taxes from the consumer and then send them on to the government. The stores don't actually keep any of the money they collect from consumers as it flows through to the government directly.

Calculating Sales Tax on Purchases

When Melissa buys her items, she needs to make sure she has enough money to pay for the cost of the item listed on the tag, as well as the sales tax that the store will charge on the purchase. The formula for calculating the sales tax is:

Selling price x sales tax rate

For example, Melissa has purchased a blouse that has a cost of $50 and the sales tax rate is 7%. In order to calculate the amount of sales tax that Melissa must pay, it is helpful to convert the sales tax from a percentage to a decimal. In other words, a 7% tax rate would become 0.07 (7 / 100) when it is converted. The total amount of sales tax that Melissa must pay on her $50 purchase is $3.50 ($50 x .07).

Since Melissa must pay for the cost of the blouse as well as the tax, she must calculate the total amount to pay the cashier and that formula is:

Total sale amount = selling price + sales tax

Once the sales tax is calculated, Melissa must pay $53.50 ($50 + $3.50) for her blouse.

There is another way that Melissa can calculate her total cost in one step. After converting the sales tax rate to a decimal, she can multiply the purchase cost by the tax rate as follows:

Total sale = selling price x (1 + sales tax rate)

Using this formula, Melissa would pay the same amount of $53.50 but she would calculate it differently: $50 x (1.07).

Calculating the Sales Tax Rate Included in Total Sale Amount

Sometimes we buy items where the sales tax is already included in the total price of the product. For example, if Melissa were buying a chocolate bar from a vending machine, the price displayed would be the amount she would put into the machine. The displayed cost already includes the sales tax.

Let's assume that Melissa gets hungry while she's at the mall and decides to buy a soft drink from a vending machine. The cost of the drink is $2.10 and Melissa wonders how much tax is included in the amount she is paying. The current tax rate in her area is 5%. We know from the previous formula for calculating the total cost of an item that:

Total sale amount= selling price x (1 + sales tax rate)

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