Sales tax

Ciaran Burke

Page written by AI. Reviewed by Ciaran Burke on March 13, 2024.

Definition

Sales tax is a consumption-based tax imposed by governments on the sale of goods and, in some cases, services.

What is sales tax?

Sales tax is a form of indirect tax that is typically collected by the seller at the point of sale and then paid to the government. The tax is usually calculated as a percentage of the retail price of a product or service and is added to the total amount paid by the consumer.

Sales tax rates vary widely depending on the jurisdiction. Different levels of government may impose their own sales tax rates, and within a country or state, local jurisdictions may have their own rates.

Sales tax systems can be destination-based or origin-based. In a destination-based system, the tax rate is determined by the location where the goods are consumed, while in an origin-based system, it is based on the location of the seller.

Sellers are responsible for paying the collected sales tax to the relevant tax authority. This involves periodic reporting and payment, and failure to do so can result in penalties.

If you want to find out how much sales tax you are supposed to be paying, try our sales tax calculator today.

Example of sales tax

Let’s say Sarah goes to a local electronics store to purchase a new smartphone. The price of the smartphone is £800, and the sales tax rate in her area is 8%.

  1. Calculating sales tax: Sarah needs to calculate the sales tax on the smartphone. She multiplies the price of the smartphone by the sales tax rate to find the amount of sales tax.Sales tax = Price of smartphone × Sales tax rate = £800 × 0.08 = £64
  2. Total cost: To find the total cost of the smartphone including sales tax, Sarah adds the sales tax amount to the price of the smartphone.Total cost = Price of smartphone + Sales tax = £800 + £64 = £864

So, Sarah pays a total of £864 for the smartphone, including £64 in sales tax. The store will then remit the sales tax collected to the appropriate government authority.

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