A common confusion for new business owners at sales tax time is not being able to match the sales/use tax collected versus the calculated sales tax based on total sales. There is a very good reason and solution for this.
Let’s assume that your tax rate is 8.25% and you had $1,000 in sales. By applying 8.25% to $1,000 then your tax should be $82.50. However how does this change if you sold 1,000 $1 items?
The tax on $1 at 8.25% is $0.0825, but we do not have $0.0825 monetary instruments, so the tax that is collected is $0.08. The tax is rounded down for numbers below $0.005 and rounded up for numbers above $0.005. So if the total with tax is $14.346, then the total becomes $14.35. Back to the example of 1,000 items at $1. Since $0.08 is collected each time, then the total collected is $80.00 on $1,000 in total sales.
Typically, the difference between tax collected and the tax calculated on total sales is very small due to the fact the 50% of the transactions are rounded up and the other 50% are rounded down. Note that a store can also end up collecting more tax than the calculated tax on total sales.
Here are two solutions from an accounting and taxing perspective.
1. If the difference is small, you can pay the difference. So in the case above one would report $1,000 in total sales and pay $82.50.
2. If the difference is large or one wants to only pay what was collected, then include an explanation and a sales report to the prospective taxing agency that exhibits the taxes that were collected on a per transaction basis.
Here are several other matters to note:
1. The above is more applicable to operations with smaller item sales.
2. Even if the tax rate is an even number (i.e. 10%), since the item price varies, the same issue will exist. In the above example, 10% of $1,000 and 10% of 1,000 $1 items is the same, however if there were 1,000 items of difference prices, then the collected and calculated would not match either.
3. If you operating a store that sells items by weight (i.e. deli, frozen yogurt, bakery), then you are more susceptible to variation because a wider range of prices are charge. A taco shop sells tacos for $1 and $2.50, but a frozen yogurt shop can end up selling frozen yogurt at $7.01, $7.02, $7.03, etc.
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