If you run an online business or an e-commerce store that sells to customers in the US, you need to know how to calculate sales tax. As a seller, you are responsible for collecting and remitting sales tax to the appropriate authorities.

But how do you know how much sales tax to charge and pay? In this blog post, we will explain the different methods of how to calculate sales tax, the sales tax calculation formula, and some examples of sales tax calculations.

Firstly, let’s do a quick run-through of what sales tax is and how sales tax works. You can return to this page as soon as you are done grasping the basics of sales tax

How to calculate sales tax for ecommerce and online sales

If you sell to buyers in different states or countries, you may need to charge different sales tax rates depending on the destination of your shipment. This is because different jurisdictions have different tax laws and rules that apply to online sales.

To calculate sales tax for ecommerce and online sales, you need to follow these steps:

1. Determine the sales tax rate

Identify the applicable sales tax rate based on your location.

2. Determine the total taxable amount

Calculate the total amount of the sale subject to tax.

3. Multiply taxable amount by tax rate

Multiply the taxable amount by the sales tax rate (in decimal form).

4. Add sales tax to the total

Add the calculated sales tax to the original total to get the final amount.

What are the different methods of how to calculate sales tax?

There are two main methods of calculating sales tax: origin-based and destination-based.

1. Origin-based sales tax: means that you charge sales tax based on where you, the seller, are located. This method is simpler, but it only applies to a few states, such as Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia  

2. Destination-based sales tax: means that you charge sales tax based on where your customer, the buyer, is located. This method is more complex, but it applies to most states, especially if you sell to customers in different states.

To use either method, you need to determine two things: your sales tax nexus and your sales tax rate.

1. The sales tax nexus: is the connection between you and a state that requires you to collect and remit sales tax in that state. You can have a sales tax nexus in a state if you have a physical presence (such as an office, warehouse, or employee) or an economic presence (such as a certain amount of sales or transactions) in that state.

2. The sales tax rate is the percentage of tax that you charge on top of the sale price. The sales tax rate varies by state, county, city, and local jurisdiction. You can find the sales tax rate for your location or your customer’s location by using a sales tax calculator or a sales tax table.

Sales tax calculation formula

The sales tax calculation formula is simple: you multiply the sale price by the sales tax rate to get the sales tax amount. Then you add the sales tax amount to the sale price to get the total price.

The formula looks like this:

Sales tax amount = Sale price x Sales tax rate.

Total price = Sale price + Sales tax amount`

For example, if you sell a product for $100 and the sales tax rate is 7%, the sales tax amount is $7, and the total price is $107.

Examples of sales tax calculations

Let’s look at some examples of sales tax calculations using the origin-based and destination-based methods.

Origin-based sales tax calculation example

Suppose you are an online seller based in Dallas, Texas, and you sell a product for $100 to a customer in Houston, Texas. Texas is an origin-based sales tax state, so you charge sales tax based on your location. The sales tax rate in Dallas is 8.25%, which includes the state rate of 6.25% and the local rate of 2%.

Using the sales tax calculation formula, you get:

Sales tax amount = $100 x 0.0825 = $8.25`

Total price = $100 + $8.25 = $108.25`

You collect $8.25 in sales tax from your customer and remit it to the Texas Department of Revenue.

Destination-based sales tax calculation example

Suppose you are a seller located in New York, which uses destination-based sales tax for intrastate sales. You sell a product for $100 to a buyer located in Buffalo, which has a local sales tax rate of 4.75%. 

The state sales tax rate in New York is 4%. What is the sales tax amount and the total amount due?

Since New York uses destination-based sales tax, you have to charge the sales tax rate of the buyer’s location, which is 4% + 4.75% = 8.75%. 

The sales tax amount is:

Sales Tax Amount = 0.0875 x 100

Sales Tax Amount = 8.75

The total amount due is:

Total Amount Due = 100 + 8.75

Total Amount Due = 108.75

How to calculate sales on a discounted item

Here are the steps to calculate sales on a discounted item

1. Find out the original price of the item and the discount percentage, or amount. For example, if the original price is $50 and the discount is 20%, then the discount amount is $10.
2. Subtract the discount amount from the original price to get the discounted price. For example, $50 – $10 = $40.
3. Find out the sales tax rate in your location. You can use a sales tax calculator or look up the rate online. For example, if the sales tax rate is 7%, then the sales tax rate as a decimal is 0.07.
4. Multiply the discounted price by the sales tax rate to get the sales tax amount. For example, $40 x 0.07 = $2.80.
5. Add the sales tax amount to the discounted price to get the total price with tax. For example, $40 + $2.80 = $42.80.

The formula for calculating sales tax on a discount item is:

Total price with tax= (Original price−Discount amount) × (1+Sales tax rate)

How to calculate your sales liability

To calculate your sales tax liability, you need to know the following information:

1. The sales price of the goods or services that you sold or purchased
2. The sales tax rate that applies to the location and type of the transaction
3. The sales tax exemptions or discounts that apply to the transaction

The basic formula for calculating sales tax liability is:

Sales tax liability = sales price x sales tax rate

However, this formula may need to be adjusted depending on the sales tax system and the rules of the state or locality where the transaction takes place. 

For example, some states may use a tax-inclusive or tax-exclusive method to calculate sales tax, which affects how the sales price is determined. Some states may also have different sales tax rates or exemptions for different goods or services, such as clothing, food, or prescription drugs.

To find out the exact sales tax liability for your transaction, you can use our sales tax calculator

How to calculate gross sales from sales tax

Sometimes, you may need to calculate your gross sales (the total amount of sales before deducting any expenses) from the sales tax you collected. This can help you determine your taxable income and your sales tax liability.

To calculate your gross sales from sales tax, you need to 

• Divide the sales tax amount by the sales tax rate and 
• Add the result to the sales tax amount. 

The formula looks like this:

Gross sales = Sales tax amount / Sales tax rate + Sales tax amount

For example, if you collected $500 in sales tax at a rate of 5%, your gross sales are:

Gross sales = $500 / 0.05 + $500 = $10,500`

How to calculate sales tax percentage from total

To calculate the sales tax percentage from the total price, you need to 

• Subtract the sale price from the total price
• Divide the result by the sale price and multiply by 100

The formula looks like this:

Sales tax percentage = (Total price – Sale price) / Sale price x 100`

For example, if the total price of a sale is $105 and the sale price is $100, the sales tax percentage is:

Sales tax percentage = ($105 – $100) / $100 x 100 = 5%`

How to calculate sales tax from total

Sometimes, you may need to calculate the sales tax amount from the total price of a sale. This can help you separate the sales tax from the sale price and report it to the tax authorities.

To calculate the sales tax amount from the total price, you need to 

• Divide the total price by 1 plus the sales tax rate, and 
• Subtract the result from the total price. 

The formula looks like this:

Sales tax amount = Total price – Total price / (1 + Sales tax rate)`

For example, if the total price of a sale is $105 and the sales tax rate is 5%, the sales tax amount is:

Sales tax amount = $105 – $105 / (1 + 0.05) = $5`

How to calculate sales tax backwards from total

Sometimes, you may need to calculate the sales tax amount and the sale price from the total price of a sale. This can help you reverse-engineer the sales tax calculation and determine the original price of the product or service.

To calculate the sales tax amount and the sale price from the total price, you need to use the same formula as above, but solve for the sale price instead of the sales tax amount. 

The formula looks like this:

Sale price = Total price / (1 + Sales tax rate)`

For example, if the total price of a sale is $105 and the sales tax rate is 5%, the sale price is:

Sale price = $105 / (1 + 0.05) = $100`

Then, you can subtract the sale price from the total price to get the sales tax amount:

Sales tax amount = Total price – Sale price = $105 – $100 = $5`

How to calculate sales tax included in price

Sometimes, you may need to calculate the sales tax amount and the sale price when the sales tax is already included in the price. This can happen when you buy a product or service from a seller who does not itemize the sales tax separately.

To calculate the sales tax amount and the sale price when the sales tax is included in the price, you need to divide the price by 1 plus the sales tax rate and subtract the result from the price. 

The formula looks like this:

Sales tax amount = Price – Price / (1 + Sales tax rate)

Sale price = Price / (1 + Sales tax rate)

For example, if the price of a product is $105 and the sales tax rate is 5%, the sales tax amount and the sale price are:

Sales tax amount = $105 – $105 / (1 + 0.05) = $5`

Sale price = $105 / (1 + 0.05) = $100`

How to calculate use tax

Use tax is a tax that you pay when you buy a product or service from a seller who does not charge you sales tax. This can happen when you buy online from a seller who does not have a sales tax nexus in your state or when you buy from another state or country and bring the product or service to your state.

Use tax is usually the same rate as sales tax in your state, and you are responsible for reporting and paying it to your state tax authority. 

You can use the same formula as sales tax to calculate use tax:

Use tax amount = Sale price x Use tax rate

Total price = Sale price + Use tax amount

For example, if you buy a product for $100 from an online seller who does not charge you sales tax and your state’s use tax rate is 5%, the use tax amount and the total price are:

Use tax amount = $100 x 0.05 = $5

Total price = $100 + $5 = $105

You need to keep track of your purchases that are subject to use tax and file a use tax return with your state tax authority.

How to calculate sales tax rate

The sales tax rate is the percentage of tax that you charge on top of the sale price. 

To calculate the sales tax rate, you need to 

• Divide the sales tax amount by the sale price and 
• Multiply by 100 

The formula looks like this:

Sales tax rate = Sales tax amount / Sale price x 100

For example, if the sales tax amount is $7 and the sale price is $100, the sales tax rate is:

Sales tax rate = $7 / $100 x 100 = 7%

How to calculate the total transaction amount for a purchase

Next, to calculate the total transaction amount for a purchase, you’d need to add the selling price of the product to the total sales tax required.

(Product price) + (Total Sales Tax) = Total Transaction Amount

Let’s use the same example from above where the price of the product is $80, and the total sales tax we got was $5.3

80 [Product price] + 5.3 [Total Sales Tax] = $85.3 [Total Transaction Amount]

Another method to calculate the total amount of a purchase without having to first calculate the total sales tax is to multiply the product price by 1 plus the sales tax rate, see formula below:

(Price of the product) * (1 + Sales Tax Rate) = Total Transaction Amount

Example: 80 [Product price] * 1.06625 [1 + Sales Tax Rate] = $85.3 [Total Transaction Amount]

Do you calculate sales tax before or after discount? 

Generally, sales tax is calculated after a discount, meaning that the tax applies to the price after the discount is applied. For example, if your normal selling price is $30 but you are offering a 5-percent discount for first time customers, the tax base is $28.50. 

However, some discounts, such as manufacturer’s coupons or promotions that are reimbursed by a third party, are not used to reduce the sales tax base. In that case, the sales tax applies to the full price before the discount is applied.

Common mistakes to avoid when calculating sales tax

1. Not registering before collecting sales tax. If you have nexus in a state, you need to register with the state tax authority before you start collecting sales tax from your customers. Otherwise, you may face fines, penalties, and interest for uncollected or unremitted sales tax
   
2. Not knowing the taxability of your products or services. Different states have different rules and exemptions for what is subject to sales tax. For example, some states tax food, clothing, medicine, or digital goods, while others do not. You need to research the taxability of your products or services in each state where you make sales and apply the correct sales tax rate
   
3. Not verifying the validity of exemption or resale certificates. If you sell to customers who are exempt from sales tax, such as non-profit organizations, government agencies, or resellers, you need to obtain and verify their exemption or resale certificates. These certificates prove that the customers are eligible for sales tax exemption and the reason for the exemption. If the certificates are missing, expired, or invalid, you may be liable for the sales tax that you did not collect.
   
4. Not tracking changes in sales tax rates, rules, and boundaries. Sales tax laws and regulations are constantly changing in the US. There are over 11,000 jurisdictions that may have different sales tax rates, rules, and boundaries. You need to keep track of these changes and update your sales tax calculations accordingly. Otherwise, you may undercharge or overcharge your customers and face audit risks
   
5. Not understanding the difference between sales tax and use tax. Sales tax is the tax that is charged on the sale of goods and services by the seller to the buyer. Use tax is the tax that is charged on the use, storage, or consumption of goods or services that were purchased from another state or country and brought into the state. Use tax is usually the same as the sales tax rate and is paid by the buyer directly to the state tax authority. You need to know when to charge sales tax and when to report use tax on your purchases or sales.
   
6. Not using an automated solution to calculate and file sales tax. Calculating and filing sales tax manually can be time-consuming, error-prone, and tedious. You need to collect and remit sales tax to multiple state and local tax authorities, usually on a monthly, quarterly, or annual basis. You also need to fill out the correct forms and pay the taxes on time. Using an automated solution, such as Sales Tax Management Software, can help you simplify and streamline the sales tax process and avoid costly mistakes

How does Amazon calculate sales tax

Amazon calculates, collects, and remits sales tax on behalf of sellers for items shipped to customers in the states and territories that have enacted Marketplace Facilitator, Marketplace Fairness, or similar laws. 

These laws shift collection responsibility from the seller to the marketplace, facilitating the seller’s sale.

Amazon calculates sales tax based on the following factors:

• By determining the identity of the seller. Amazon may collect sales tax on items sold by Amazon or by third-party sellers, depending on the state and the seller’s status.
  
• By determining the type of item or service purchased. Some items or services may be exempt from sales tax or subject to a reduced tax rate, depending on the state and the product category.
  
• By determining the delivery address of the order. Amazon calculates sales tax based on the buyer’s location, using the applicable state, county, city, and local tax rates.

Amazon shows the amount of sales tax during checkout before the buyer places the order. The buyer can also see the sales tax amount on the order confirmation and invoice. The seller can see the sales tax amount on the Seller Hub Order Details page and through the Download Order Report.

How does Shopify calculate sales tax

Shopify calculates sales tax based on the following factors:

1. By identifying the seller’s location. Shopify uses the seller’s address to determine the origin-based sales tax rate, which applies to some states where the seller charges sales tax based on their location.
   
2. By identifying the buyer’s location. Shopify uses the buyer’s address to determine the destination-based sales tax rate, which applies to most states where the seller charges sales tax based on the buyer’s location. Shopify also uses the buyer’s address to determine the sales tax nexus, which is the connection or presence in a state that requires the seller to collect and remit sales tax in that state.
   
3. By identifying the product category. Shopify allows the seller to categorize their products based on the product type, such as clothing, food, or digital goods. Some product categories may be exempt from sales tax or subject to a reduced tax rate, depending on the state and the product type.

Shopify shows the amount of sales tax during checkout, before the buyer places the order. The buyer can also see the sales tax amount on the order confirmation and invoice. The seller can see the sales tax amount on the Shopify admin dashboard and through the sales tax reports.

How does eBay calculate sales tax

eBay calculates sales tax based on the following factors:

• By using the seller’s location. eBay uses the seller’s address to determine the origin-based sales tax rate, which applies to some states where the seller charges sales tax based on their location.
  
• By using the buyer’s location. eBay uses the buyer’s address to determine the destination-based sales tax rate, which applies to most states where the seller charges sales tax based on the buyer’s location. eBay also uses the buyer’s address to determine the sales tax nexus, which is the connection or presence in a state that requires the seller to collect and remit sales tax in that state.
  
• By using the product category. eBay allows the seller to categorize their products based on the product type, such as clothing, books, or electronics. Some product categories may be exempt from sales tax or subject to a reduced tax rate, depending on the state and the product type.

AtomicTax sales tax calculator

AtomicTax is a sales tax software that helps merchants (sellers) calculate, collect, and remit sales tax for their online sales. AtomicTax integrates with various ecommerce platforms, such as Shopify, WooCommerce, BigCommerce, and Magento, and automatically calculates and collects sales tax.

With AtomicTax, merchants can automate tracking their sales tax nexus, register for sales tax permits, file and pay their sales tax returns, and manage their sales tax exemptions. AtomicTax provides sales tax reports and analytics that show the sales and tax data by state, county, city, and local jurisdiction and the amount of tax that is due or collected

To use AtomicTax, merchants need to sign up for an account and connect their ecommerce platforms to AtomicTax. Then, AtomicTax will automatically calculate and collect sales tax on the transactions that are processed through the ecommerce platforms. Merchants can also use AtomicTax to manually enter or import sales data from other sources, such as Amazon, eBay, or PayPal. 

You can register to start a free trial here; AtomicTax free trial signup

Sales tax calculations FAQs

Does WooCommerce calculate sales tax? 

Yes, WooCommerce can calculate and collect sales tax on your online transactions based on the location of your store, the location of your customer, and the product category. You can enable automated taxes in your WooCommerce settings or use a sales tax software or platform that integrates with WooCommerce, such as tomicTax.

Does Stripe calculate sales tax? 

Yes, Stripe can calculate and collect sales tax on your payments based on the location of your business, the location of your customers, and the type of product or service sold. You can use Stripe Tax to automate your tax compliance or use a third-party tax provider that integrates with Stripe.

Does Etsy calculate sales tax? 

Yes, Etsy automatically calculates, collects, and remits sales tax on behalf of sellers for items shipped to customers in the states and territories that have enacted marketplace facilitator, marketplace fairness, or similar laws. 

How do I know if my product or service is taxable? 

The taxability of a product or service depends on the state and local tax laws and regulations that apply to your business. Each state has its own rules on what types of products and services are subject to sales tax and what types of exemptions or reduced rates are available. 

Some common factors that affect the taxability of a product or service are: the physical or digital nature of the product; the classification or category of the product or service; the purpose or use of the product or service; and the status or identity of the buyer or seller. 

Can I get a refund for overpaid sales tax? 

It depends on the state and the type of tax that you overpaid. Generally, you have three options to claim a refund for overpaid sales or use tax:

• Deduct the overpayment on your next tax return.
• File an amended return for the period that you overpaid.
• File an application for a refund with the state tax authority.

You may need to provide supporting documents, such as receipts, invoices, exemption certificates, or proof of payment, to substantiate your refund claim. You may also need to obtain an assignment of rights form from the vendor who charged you sales tax, if applicable. 

The refund process may vary by state and may take several weeks or months to complete. 

Conclusion

Sales tax is a complex and dynamic topic that affects online businesses and ecommerce sellers. You need to know how to calculate sales tax based on your sales tax nexus, your sales tax rate, your sales tax method, and your product category. You also need to register for sales tax permits, collect and remit sales tax to the relevant authorities, and file and pay your sales tax returns.

To simplify and automate your sales tax compliance, you can use sales tax software or a platform that integrates with your online store and handles the sales tax calculation, collection, and remittance for you. An example of reliable sales tax compliance software to use is AtomicTax

We hope you found this blog post helpful and informative. If you have any questions or comments, please feel free to leave them below. Thank you for reading!