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E.g. There is a sale with 3 items, each costing $1.00. Sales tax is 12.4%. In calculating the tax for each item, do I round the tax amount first and then total everything up? Like this:

ITEM 1: $1.00 + $0.124 = $1.124 -> $1.12
ITEM 2: $1.00 + $0.124 = $1.124 -> $1.12
ITEM 3: $1.00 + $0.124 = $1.124 -> $1.12
TOTAL: $3.36

Or do I total everything up and then round? Like this:

ITEM 1: $1.00 + $0.124 = $1.124
ITEM 2: $1.00 + $0.124 = $1.124
ITEM 3: $1.00 + $0.124 = $1.124
TOTAL: $3.372 -> $3.37

Is one method correct? Might it depend on local laws?

  • 3
    Sales tax is generally charged on the total amount of any given sale and not on the individual items separately. Thus, there is only one rounding involved, and it is always upwards (ceiling function), never downwards using the floor function as you are showing it. In your example, you would pay $3.00 times .124 = .372 => $0.38 in tax, not $0.37 the way you have it. But I am sure someone will point out localities where the rules are different. – Dilip Sarwate May 14 '12 at 20:11
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    In California, sales tax is always on total, and always rounded up. – littleadv May 14 '12 at 20:13
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    It is NOT the case that sales tax always rounds upward. See for example, gst-tax.com/GST/Accounting_for_GST.htm – ChrisInEdmonton May 14 '12 at 20:19
  • I would add a slightly different question... How would I calculate it if different items had different percentages of tax on them? For example, some areas charge a different rate on alcohol sale. If the alcohol is included on the same receipt as an item at a different rate, where would the rounding occur, still no rounding until the end? Essentially the same exact question, but allows for a more in depth answer. – Kellenjb May 14 '12 at 21:05
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    @Kellenjb you calculate separate totals per each tax. I think US registers are programmed to support at least two levels of sales tax – littleadv May 14 '12 at 21:37
4

Tax is often calculated per item. Especially in the days of the internet, some items are taxable and some aren't, depending on the item and your nexus. I would recommend calculating and storing tax with each item, to account for these subtle differences.

EDIT:

Not sure why this was downvoted, if you don't believe me, you can always check with Amazon: http://www.amazon.com/gp/help/customer/display.html/ref=hp_468512_calculated?nodeId=468512#calculated

I think they know what they're talking about.

FINAL UPDATE:

  • Nexus is defined as where your business is registered to operate.
  • The US Government defines (simply) 2 types of products, tangible (potentially taxable) and intangible goods. In MOST cases (each case is subject to interpretation and the law), tangible goods are taxable, and intangible goods are not.
  • If your business has it's offices in California, you have nexus in California.
  • If your business does not have offices or any other nexus in Nevada, you do not have nexus in Nevada.

Now, if someone goes to your site, and buys something from your business (in California) and the shipping address for the product is Nevada, then taxes do not have to be collected. If they have a billing address in California, and a shipping address in Nevada, and the goods are shipping to Nevada, you do not have to declare tax.

If you have a mixture of tangible (computer, mouse, keyboard) and intangible assets (warranty) in a cart, and the shipping address is in California, you charge tax on the tangible assets, but NOT on the intangible assets.

Yes, you can charge tax on the whole order. Yes for most businesses that's "Good enough", but I'm not trying to provide the "good enough" solution, I'm simply telling you how very large businesses run and operate. As I've mentioned, I've done several tax integrations using software called Sabrix (Google if you've not heard of it), and have done those integrations for companies like the BBC and Corbis (owned and operated by Bill Gates).

Take it or leave it, but the correct way to charge taxes, especially given the complex tax laws of the US and internationally, is to charge per item. If you just need the "good enough" approach, feel free to calculate it by total.

Some additional reading:

http://en.wikipedia.org/wiki/Taxation_of_Digital_Goods

Another possible federal limitation on Internet taxation is the United States Supreme Court case, Quill Corp. v. North Dakota, 504 U.S. 298 (1992),[6] which held that under the dormant commerce clause, goods purchased through mail order cannot be subject to a state’s sales tax unless the vendor has a substantial nexus with the state levying the tax.

In 1997, the federal government decided to limit taxation of Internet activity for a period of time. The Internet Tax Freedom Act (ITFA) prohibits taxes on Internet access, which is defined as a service that allows users access to content, information, email or other services offered over the Internet and may include access to proprietary content, information, and other services as part of a package offered to customers. The Act has exceptions for taxes levied before the statute was written and for sales taxes on online purchases of physical goods.

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    the fact they do it doesn't mean that's how it is supposed to be done. Rounding up on every item leads to overcharging of the tax. It is plain wrong, simple math. Amazon are doing plenty of stuff that can be characterized as "plain wrong", and it shouldn't be referred to as "the right way of doing things". – littleadv May 14 '12 at 22:06
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    The government always wants their money, so it's always ROUND_UP, meaning 0.005 goes to 0.01 and 0.004 goes to 0. – MaddHacker May 14 '12 at 22:07
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    @MaddHacker can you provide any reference to some CA BOE (or some other tax authority) instructions to round up per item and not per total? – littleadv May 14 '12 at 23:01
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    Even if you are determining line items as taxable or not, you can still apply the tax after the taxable item costs have been summed up and arrive at a correct answer. Applying the tax on each and every taxable line item isn't necessarily the only way. – Chris W. Rea May 14 '12 at 23:10
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    @MaddHacker P.S. Your answer never mentions the words "round" or "rounding". In each of the OP's cases, the tax is being considered per line-item .. the question is about the rounding in particular. And your one comment above about rounding doesn't indicate if you intend that to be per line-item, or on the total. – Chris W. Rea May 15 '12 at 14:53
3

Taxes should not be calculated at the item level. Taxes should be aggregated by tax group at the summary level.

The right way everywhere is

LINE ITEMS

  • ITEM 1: $1.00 (taxable)
  • ITEM 2: $1.00 (taxable)
  • ITEM 3: $1.00 (taxable)

SUMMARY

  • Total of taxable items for this tax rate: $3.00
  • Your tax amount, rounded half up: .37
  • Your total: 3.37

PS:If you'd charge at the item level, it would be too easy to circumvent the law by splitting your items or services into 900 items at $0.01 (Which once rounded would mean no tax). This could happen in the banking or plastic pellets industry.

2

First of all to answer the basic question "Is one method correct? Might it depend on local laws?" Yes it does depend on local laws. Because ultimately the business will have to file forms with the sate/county/city.

These forms are going to ask for the total sales based on the tax category (tax free, x%, y%). Each transaction could have parts that fall into each category. The local taxing authority decides what goes into each category. The local taxing authority also determines how often the business needs to submit the taxes. They can even decide to base the rates used by where the customer lives.

A business is not required to charge directly for sales tax. That is why frequently at sporting events, the price on the menu notes that all sales taxes are included. I suppose not directly charging a sales tax makes the monthly calculation harder, but the state will still get their money.

Rounding up at the end of the entire transaction is enough to make sure they collect enough taxes, so they don't have to dip into their profits.

  • Sales tax is a tax on the consumer, not the business, but rather than go after consumers demanding that they pay the sales tax they owe, the government requires businesses to collect the tax at the point of sale and send it to the government. If you buy a car from someone other than a dealer, the sales tax is collected when you register the car and get a title for it. Another place where sales tax is collected directly from the consumer is in the guise of use tax on sales from out-of-state vendors that is often collected on page x of the state income tax return. Many people just ignore this. – Dilip Sarwate May 15 '12 at 1:45
  • So if I'm understanding this correctly, on an individual sale it doesn't really matter how it's calculated because when the business pays those taxes it's based on their total sales where only one rounding takes place. – Dylan Nissley May 15 '12 at 13:52
  • So if there were three separate $1.00 sales with sales tax being calculated by rounding up or down on the half penny, they would have to pay taxes on $3.00 which would be $0.37, more than the $0.36 they collected, which means it might be easier to make sure that the appropriate amount was collected if they simply rounded up on any fractional cent. – Dylan Nissley May 15 '12 at 13:58
  • So it's pretty much up to each individual business to decide how they will calculate tax, as it doesn't seem like there are any laws dictating a specific way of doing it, as long as those taxes get paid. But what if you over collect? It seems like there would be repercussions for that? – Dylan Nissley May 15 '12 at 14:03
  • Rounding rules appear to vary by US state. Ohio changed their method in 2006: tax.ohio.gov/sales_and_use/information_releases/st200505.aspx – D-Money May 27 '14 at 22:32
2

You should total the items first, to get $3.00, then add the tax, then round up/down accordingly. Your two examples above don't offer this option, even though your second example arrives at the same result. In your first example, a number of items taxed one at a time might result in many .006 results which would round to .01. A long enough list of items would result in an error of many cents depending how many items there are. Totaling first then applying tax results in your saving .004 or losing .005 cents maximum due to rounding.

See A Guide to Sales and Use Tax which is a document put out by the Massachusetts Dept of Revenue. In the chart for tax, it shows that $1.09 is taxed at five cents, but at 5%, it would be 5.45. So, at least for this state, I believe I correctly stated the rounding process.

  • @JoeTaxpayer Actually, adding $1 + $1 + $1 and then multiplying by 1.124 gives the same result as multiplying each $1 by 1.124 and then adding the amounts. The OP's second calculation is equivalent to what you want him to do; the only error is in the last line where he rounded down whereas in most jurisdictions (though apparently not in Canada), rounding is upwards – Dilip Sarwate May 14 '12 at 22:32
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    If a large store sells 1 million candy bars at $1 plus 12.4% tax, it collects $1.124 rounded up to $1.13 from each customer, that is, $130K total. However, when it forwards the collected sales tax to the government, it shows $1,000,000 as the amount of sales, $124K as the tax it is responsible for collecting nad forwarding to the government, keeping the $6K as a nice additional profit. With mathematical rounding, it would collect $120K but owe the government $124K. Which option is it going to choose? – Dilip Sarwate May 15 '12 at 1:21
  • Dilip - Am I mistaken? Does the $1.124 round up instead of down for sales tax? – JoeTaxpayer May 15 '12 at 2:03
  • @DilipSarwate: A large store is selling $1 each candy bar, the receipt is for individual item and tax calculated. If in a particular sale, a buyer buys qty 5, tax would be on $5. The sum of the taxes is tax the store needs to pay Govt and not recalculate again on $6 of sales. – Dheer May 15 '12 at 4:07
  • Joe, I believed that the $1.124 would be rounded up to $1.13 everywhere but as ChrisinEdmondton points out, not in Canada. – Dilip Sarwate May 15 '12 at 10:54

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