When is a penny not a penny?

December 19, 2014

Rounding vs. the Sales Tax Bracket System We all learned about rounding in grade school. If you have something, that calculates out to less than 0.5 cents you round down. If it’s 0.5 cents you round up to the next penny. If you multiply a purchase price of .74 cents by a 6% sales tax rate you get .0444. But since you can’t pay the retailer .0444 cents you round this down to .04 cents. Really clear cut, simplicity in itself. But wrong if you are making a sale in Florida. In Florida they go by a bracket schedule that requires the seller to collect .05 cents of tax on that sale. Not to pick on Florida, they are only one of several states and locally administered areas throughout the country that require that you collect based on bracket schedules that are not the mathematical equivalent of their sales tax rates. Another example is Maine. Maine has a 5.5 percent sales tax based on a bracket schedule. But they also have a 5% service provider tax that applies tax based on rounding. So, in the same state you can have one tax that doesn’t follow general rounding methodology and another tax that does. Collecting extra Tax Pennies Adds Up States which collect using these methods have a very strong incentive not to change. Collecting extra pennies can amount to lots of money not only from consumers but also from the fines and penalties unsuspecting merchants amass when they don’t follow the maze of rules surrounding the collection of pennies. Do you round up or down? Do you round after collecting the tax based on the whole amount of the invoice or do you do it based on each line item? In some states you are required to combine amounts while in others you are simply required to use a consistent method. Maybe we need to send some legislators back to grade school to get some consistency. Or maybe they are smarter than a 5th grader, to borrow the name of a TV show. After all they do know how to get money into their state’s coffers without increasing the tax rate, just the taxes collected.

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