A Discussion on the Reporting of State Sales Tax

05/18/06

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A Recent Finding with Respect to the Reporting of State Retail Sales Tax for In-State Book Sales

In a discussion with another online bookseller, I learned that he did not know how to properly calculate the retail sales tax he paid the state for book sales in his state.  This intrigued me and made me wonder how many other online booksellers were overpaying their retail sales tax, so I contacted a few more and learned that almost all of them were overpaying, or they were paying a bookkeeper to figure it out for them. 

I want to give an example so the logic is understood, but first, I want to make it clear that I am not a bookkeeper, a tax consultant, a CPA, or a lawyer, I am an engineer, and the information I am providing should not be construed as accounting, tax, or legal advice.  I have derived my method of calculating my state sales tax obligation from discussions with accountants and am passing it on to you as my opinion only.

In my example of how most of the online booksellers I spoke with calculated their state sales tax obligation for the sale of books in their own state, I will make the following assumptions:

Total Payment Received = $10.00

State Retail Sales Tax Rate = 6.5%

The method that I found most booksellers used to calculate their state sales tax obligation is:

Total Payment Received x State Retail Sales Tax Rate = State Retail Sales Tax

or,

$10.00 x .065 = $0.65 (and this is what they were paying the state for the $10.00 transaction)

The error (as I interpret the tax rules) is that they are assuming that the Book Selling Price is $10.00.  This implies that the Book Selling Price is the same as the total transaction amount instead of adopting a position that the $10.00 represents the Book Selling Price plus the State Retail Sales Tax  they collected.  Using this logic:

Book Selling Price + State Retail Sales Tax  = $10.00

[Eq. 1]

Now, we need to make the assertion that:

Book Selling Price x State Retail Sales Tax Rate = State Retail Sales Tax

[Eq. 2]

or, by substituting the left-hand side of the equality from Equation 2 for the State Retail Sales Tax Obligation into  Equation 1, we get:

Book Selling Price + Book Selling Price x State Retail Sales Tax Rate = $10.00

Or,

Book Selling Price x  (1 + State Retail Sales Tax Rate) = $10.00

Thus,

Book Selling Price = ($10.00) / (1 + 0.065) = $9.39

And this leads to:

State Retail Sales Tax  = $10.00  - $9.39 = $0.61

We can check our logic now.  If we sold a book for $9.39 and collected a state retail sales tax of 6.5%, we would need to collect:

$9.39 x .065 = $0.61

and

$9.39 + $0.61 = $10.00

So, we collected $9.39 from our in-state customer for the book we sold them, plus we collected $0.61 in state retail sales tax, and our assumption adds up.  Thus our state retail sales tax (that we are obligated to pay the state) is $0.61, not $0.65.

Now, in this example, the difference between what the booksellers I spoke with were paying and what they really needed to pay was only $0.04 and that doesn't amount to much, but if you were to have $3,000 a year of in-state sales and your state charges 6.5% retail sales tax, it would add up to an overpayment of state retail sales tax of $11.90 per year.  This still doesn't amount to much, but the objective is to pay the taxes that are owed and maximize the bottom line of your online bookselling business.  Every online bookseller that incorrectly calculates their in-state retail sales tax obligation is overpaying their retail sales taxes by a percentage equal to the state retail sales tax rate, i.e., if your state charges 6.5% retail sales tax and you incorrectly calculate your retail sales tax obligation as the booksellers I spoke with are doing, the retail sales tax you are paying is 6.5% too much. 

I don't know many people that owe $10,000 in federal income taxes that are willing to pay another $650 because they don't want to bother with calculating their tax obligation correctly, and the scenario is analogous to overpaying state retail sales tax.

With the tools available, particularly computers, there is no reason to get caught up in spending a lot of time trying to figure it out yourself, even my spreadsheet program, "Bookkeeping for Booksellers" will calculate your state retail sales tax obligation correctly, and in the example I cited above, the tax savings alone will almost pay for the software in the first year alone, plus you would have a lot more information presented to you visually that will show you just how well your online bookselling business is doing at any time.

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