Set Up a Sales Tax Calculation Formula

How Do I...

When you set up sales taxes, you select the appropriate tax calculation for the agency.

• If the agency requires a single rate, you select the Single Tax Rate option and then enter the rate as a percentage.
• If the agency requires a two-tier rate or a dollar limit on sales, you select the Formula option. This allows you to set up a formula on which the tax rate will be calculated.

To set up a tax calculation formula

1. Select By Formula in the How are sales taxes calculated for <Agency Name> field.
2. Use the drop-down liston the Which amount should be used to calculate sales taxes field to choose whether to apply the formula to total taxable sales or each taxable line item.
3. At For the first $, enter the dollar limit imposed by the tax authority.
4. At charge, enter the standard tax rate (percentage) that applies to the sales amount up to this dollar limit.
5. At then charge, enter the tax rate (percentage) that applies to the sales amount over and above the imposed dollar limit.

Formulas for Calculating Sales Taxes Based on State Tax Regulations

A number of state tax agencies have sales tax regulations requiring the use of a formula. Following is a list of such requirements, as well as the formulas needed to meet each requirement and the states that impose the requirement.

Maximum Dollar Sales Amount:States requiring the use of this tax calculation method include Arkansas, Florida, and Tennessee. The standard tax rate is applied to the sales amount, the amount being subject to a specific maximum dollar limit over which the rate applied is zero or a lower rate. For example, say the state sales tax is 1 percent of sales amounts up to a limit of $2,500. Any portion of the sales amount over $2,500 is not taxed.

To meet the tax requirement, do the following:

1. Select By Formula.
2. Select Total taxable sales.
3. At For the first $, enter $2,500 (the dollar limit).
4. At charge, enter 1.0 (1 percent) as the tax rate levied on this dollar limit.
5. At then charge, enter 0.0 (0 percent) as the tax rate levied on the sales amount over and above the dollar limit.

Minimum Dollar Sales Amount:Louisiana requires the use of this tax calculation method. The standard tax rate is applied only to sales amounts above a specific dollar limit. For example, say the state sales tax is 1 percent. The first $500 of the sales amount is exempt from tax.

To meet the tax requirement, you would do the following:

1. Select By Formula.
2. Select Total taxable sales.
3. For the first $, enter $500 (the dollar limit).
4. At charge, enter 0.0 (0 percent) as the tax rate levied on this dollar limit.
5. At then charge, enter 1.0 (1 percent) as the tax rate levied on the sales amount over and above the dollar limit.

Maximum Dollar Tax Amount:States requiring the use of this tax calculation method include North Carolina, North Dakota, South Carolina, Tennessee, and Vermont. The standard tax rate is applied to the sales amount, the amount being subject to a specific maximum dollar limit. For example, say the state sales tax is 1 percent. This rate is applied to a sale only until the maximum tax amount of $25 is met.

To meet the tax requirement, you would do the following:

1. Select ByFormula.
2. Select Total taxable sales.
3. At For the first $, enter $2,500 (the dollar limit).
4. At charge, enter 1.0 (1 percent) as the tax rate levied on this dollar limit to arrive at the maximum tax amount of $25.
5. At then charge, enter 0.0 (0 percent) as the tax rate levied on the sales amount over and above the dollar limit.

Maximum Percent Sales Amount:States requiring the use of this tax calculation method include Maryland, Minnesota, and South Carolina. The standard tax rate is applied to a specific maximum percentage (less than 100 percent) of the sales amount. An example of this type of calculation is a state sales tax of 1 percent applied to the first 65 percent of the sales amount.

To meet the tax requirement, you would do the following:

1. Select the Single Tax Rate.
2. Enter .65 (1 percent x 65 percent = .65 percent) as the tax rate.

Formulas Based on Each Taxable Line Item

Whether you choose to base your sales tax formula on each taxable line item of a sale or the total sale amount, the tax calculation will be applied to the total invoice amount. However, the calculation will be performed differently and result in differing tax amounts.

Say you choose $5,000 as the dollar limit taxable at the first tax rate of 5 percent. You choose to tax any portion of the sales amount over and above this limit at the rate of 1 percent. The following tables show how the sales tax would be calculated if based on total taxable sales or on each taxable line item.

Total Taxable Sales

Invoice Line Item	Amount	Tax at 5%		Tax at 1%
1	$7,000
2	$3,000
3	$5,000
Total Invoice Amount	$15,000	$5,000		$10,000
Total Tax Amount		$250	+	$100	=	$350

Each Taxable Line Item

Invoice Line Item	Amount	Tax at 5%		Tax at 1%
1	$7,000	$5,000		$2,000
2	$3,000	$3,000		$0
3	$5,000	$5,000		$0
Total Invoice Amount	$15,000	$13,000		$2,000
Total Tax Amount		$650	+	$20	=	$670

These differences would be reflected in the Taxable/Exempt Sales report for this sale transaction.

What do you want to do next?

• Set up a customer
• Perform other accounts receivable tasks
• Read the sales tax overview

Published: March 21, 2017
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