This blog was last updated on June 26, 2021
Collecting sales tax is not the focus of most companies. Even for businesses, people who learn the financial side of running a business, sales taxes can seem to be more of a nuisance than anything else. However, remember the old adage what you don’t know can hurt you. These are five sales tax gottchas that will do just that. 1. Tax can be calculated using basic mathematical computations. If you calculate sales tax of $1.5702 you collect $1.57. If you calculate sales tax of $1.575 you collect tax of $1.58. That’s the way most of us learned how to round to the nearest penny in school and that is correct in most states. However, if you’re in Maryland you need to collect $1.58 on $1.5702 not $1.57. To check for yourself, multiply a sales price of $26.17 by the 6% Maryland tax rate. You will arrive at $1.5702. Then check the Maryland sales and use bracket schedule found on the state web site. You’ll see that for a sale of $26.17, you are to collect $1.58. Maryland is one of a number of states that collect tax based on a bracket schedule. These schedules often don’t equate to 5/4 rounding, leaving the unaware facing fines and penalties for under-collecting sales tax. 2. Calculating tax one line at a time instead of on the whole invoice is correct. In some states as long as you use a consistent method it is acceptable. However, calculating on the line rather than the invoice can result in a serious over collection of taxes in states, like Florida, that require invoice collection. For example, you have a sale with 5 lines as detailed below:
Sales price Tax Rate Tax per FL 6.5% Bracket
$0.77 6.5% .06
$1.08 6.5% .08
$1.54 6.5% .11
$12.10 6.5% .79
$3.24 6.5% .22
$18.73 $1.26
Notice that if you collect based on each line of the Florida 6.5% bracket schedule, the result will be $1.26 in tax. But, if you look at the bracket schedule for a sale of $18.73 you’ll find that the tax that you should collect $1.22. By collecting on the line rather than on the invoice, you over collect sales tax by 4 cents. It may not seem like a lot, but your customers are not going to be happy and this type of issue can lead to some very bad publicity 3. If it says juice on the label its taxed like juice and not a soft drink. Rather than the name juice on the label, it’s actually the percentage of juice contained in a drink that differentiates fruit juice from soft drinks for purposes of applying sales tax in a number of states. For example, in Florida only drinks containing 100% fruit juices are exempt as fruit juice. Other drinks with lesser amounts of juice are considered soft drinks and fully taxable. While in New Jersey, drinks containing more than 50% fruit juice are exempt. Luckily, the FDA requires that any item that purports to be fruit juice contain the percentage of juice on the label. If the label does not contain that percentage then the item is not juice and should not be taxed as juice. It’s important for vendors to read the label and have proper skews to differentiate based on the percentage of juice to arrive at the correct tax rate. 4. Installation service is exempt as long as you put it on a separate line in the invoice from the property being installed. The association with the sale of the property being installed is enough to make the sale taxable even if the installation labor is separately stated in states like Tennessee, which would otherwise exempt the installation service. In Colorado, as long as the installation service is separately stated on the invoice and not a mandatory part of the sale, the installation service would remain exempt. 5. Electronically delivered digital software and digital goods are the same thing for purposes of sales tax collection. It seems that one should be able to reasonably assume that if electronically delivered software in a state is taxable or exempt, digital goods must follow, but that’s often not the case. For example, in Massachusetts, digital goods are exempt, but electronically delivered software is taxable. Conversely in Colorado, electronically delivered software is exempt, but digital goods are taxable. It’s easy to have misconceptions related to sales taxes. But, the traps above are common ones and do serve to illustrate two very basic rules. Never assume that because you think something makes sense that the taxing jurisdiction will also follow the same logic. And never assume because one taxing jurisdiction treats an item or service one way that another jurisdiction will do the same. Following these two rules will help you to avoid not only the traps above, but many of the others lying in wait for the unwary.
