Accounting and Finance Foundations

Unit 2

Accounting and Finance Foundations Unit 2: Accounting and Finance Math Workshop 140

Accounting and Finance Math Workshop

Lesson 5.4 Sales Tax

Student Guide

Many states, cities, and counties charge a sales tax on certain items. Sales tax is a percentage of the price

of an item or a percentage of the total of all taxable items. Sellers collect the sales tax from consumers for

the government. Sales tax rates differ from community to community and state to state. What is the sales

tax rate where you live?

Sales   Tax Rate    x   Price   of  Item    = Sales Tax

Sales tax is rounded to the nearest cent. If more than one tax is charged, the two are often combined. For

example, the state charges a tax rate of 6% and the city charges a tax rate of 2%. The total tax collected

would be 8%. The buyer pays the price of the item plus the sales tax.

Price   of  Item    + Sales Tax =^ Total    Cost    of  Item

Example

Brent purchased a chain saw priced at $285.99. The state in which he lives charges a 6.5% sales tax

on purchases. What sales tax is paid and what is the total cost of the chain saw to Brent?

Solution

$285.99 x .065 = $18.58935, or $18.59

$285.99 + $18.59 = $304.58

Nontaxable  Items

In some states, items such as food, prescription drugs, and charges for labor or services are nontaxable.

To find the sales tax when some items are not taxable, first find the subtotal of all taxable items. (A subtotal

is a partial total.) Calculate sales tax on only that portion of the bill. To then find the total of the bill, add the

subtotal of taxable items + the subtotal of nontaxable items + the sales tax.

Sales Tax = Sales   Tax Rate    x   Subtotal    of  Taxable Items

Total   Bill =  Subtotal    of  Taxable Items   +   Subtotal    of  Nontaxable  Items   + Sales Tax

Example

Wylie Chevrolet’s service department took three hours to repair a car. The service charge was $65

an hour. Two parts were replaced at a cost of $117.98 and $49.39. The state has a sales tax of 4%

charged on goods but not on labor. Find the total bill.

Solution

$65 x 3 = $195 (Cost of nontaxable labor)

Add the cost of the taxable parts: $117.98 + $49.39 = $167.37 (Taxable items)

Multiply the sales tax rate by the subtotal of taxable items: $167.37 x .04 = $6.69 (sales tax)

Total Bill:

Nontaxable labor + Taxable items + Sales tax

$195 + $167.37 + $6.69 = $369.06

Chapter 5