Proper Calculation of Sales and Use Tax

All Texas sellers must collect sales tax on each separate retail sale in accordance with the statutory bracket system in Tax Code Section 151.053.

Tax Code Section 151.053 states, “If the sales price involves a fraction of a dollar, the sales tax to be added to the sales price shall be computed by multiplying the percentage rate of the sales tax times the amount of the sale. A fraction of one cent that is less than one-half of one cent is not collected and a fraction of one cent that is equal to one-half of one cent or more is collected as one cent of tax.”

When the seller computes the sales tax by multiplying the tax rate by the sales price, the amount should be carried to the third decimal place. If the numeral numeral in the third decimal place is equal to or greater than five, the amount should be rounded up to the next cent. If the numeral in the third decimal place is four or less, the amount should be rounded down to the next cent. Taxpayers should not “round off” the amount of tax due using any other method.

For example, a taxable item is sold for $250 and the tax rate charged is 8.25 percent. The tax rate multiplied by the sales price equals $20.625. Because the third decimal place is a five, the amount should be rounded up and the tax would be $20.63.

When several taxable items are sold in the same transaction, sales tax is computed on the total sale of taxable items, not on the sale of each individual item.

For example, if two items are sold on the same transaction and each item is sold for $7, the seller must collect the tax on the total sum of $14. Tax must be reported and remitted to the Comptroller as required by Tax Code Section 151.410.

In addition to the method above, Tax Code Section 321 allows sellers to calculate the amount of taxes due by multiplying the taxable amount by the tax rate of each jurisdiction and then adding those amounts together.

For example, an item is sold for $20 and the total tax rate is 8.25 percent (6.25 percent state tax, 2 percent city tax). The seller should multiply $20 by the state tax rate (6.25 percent) and then multiply $20 by the city tax rate (2 percent). The seller would add state tax ($1.25) and the local tax ($.40) to compute the total tax due ($1.65).

Sellers are not allowed to “round off” the tax rate that is charged. The Texas state sales tax rate is 6.25 percent, and local sales and use tax rates range from 0.125 percent (1/8 percent) to 2 percent. Sellers may not round off a tax rate percentage that is a fraction of a whole number, but must instead calculate the amount of tax due based on the actual rate in effect at a location.

Sellers should also remember to charge tax only on the final sales price of a taxable item. The final sales price is the total after all discounts, coupons, “free” offers and all other price reductions have been subtracted. Tax is due only on the amount actually charged the customer. See Tax Code Section 151.007(c)(1).

For example, a retailer may offer a customer a 10 percent discount on all purchases. If the customer buys an item marked at $50, the discounted price becomes $45. Tax is computed on the final discounted sales price of $45.

*Originally published in the May edition of Tax Policy News – a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1205.html

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