Reverse sales tax isn't some something you pay; it's something you calculate. For example, when you're going over your business receipts, you may want to know how much is actual income and how much is sales tax. Instead of calculating sales tax on the purchase amount, you have to figure out sales tax backward and separate it from the total. You can use an online reverse sales tax calculator or figure it out yourself with a reverse sales tax formula.
Collecting Sales Tax
Like income tax, calculating sales tax often isn't as simple as "X amount of money = Y amount of state tax." In Texas, for example, the state imposes a 6.25 percent sales tax as of 2018. However cities, counties, transit authorities and "special tax districts" may together increase the tax by up to 2 percent total. Special tax districts raise money for hospitals, crime prevention, medical services and municipal development, among other causes. Two stores on opposite sides of a street could pay different rates if one of them falls in a special district.
Further muddying the waters, businesses don't charge sales tax on everything. Most states, but not all, exempt groceries; and some states tax services. Some buyers are exempt from paying sales tax, such as schools, libraries and other nonprofits. The result is that you'll have to use a little thought to get your income/sales tax ratio right.
Apply a Reverse Sales Tax Formula
If you run a retail business with computerized cash registers, they'll be able to break out the total sales tax for you. Otherwise, you'll have to go over your books or handwritten receipts and identify which transactions involved sales tax. Then apply a formula to crunch the numbers. Instead of using a sales-tax calculator, you use what's jokingly called a sales tax "decalculator."
The formula is fairly simple. Divide your sales receipts by 1 plus the sales tax percentage. Multiply the result by the tax rate, and you get the total sales-tax dollars. Subtract that from the receipts to get your non-tax sales revenue.
For example, suppose your sales receipts are $1,100, and the tax is 10 percent. Divide $1,100 by 1.1 and you get $1,000. Multiply that by 10 percent, and you get $100 sales tax, so your non-tax receipts are $1,000. You enter $1,000 in "sales" in your journal and $100 in "sales tax payable."
Use a Reverse Sales Tax Calculator
If you don't want to crunch the numbers yourself, there's no shortage of calculators to do it for you. Just search online for a decalculator or reverse calculator and you'll have plenty of options. You can also find a downloadable Excel decalculator template to save on your computer to handle the job.
- You can convert this process into spreadsheet formulas to reduce time when a customer makes a return. Use an online reverse tax calculator to make the process even simpler.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com