What Is Sales Tax?

How To Compute Sales Tax In Reverse
How To Compute Sales Tax In Reverse

The government charges sales tax as a consumption tax on the purchase of goods. A retailer collects sales tax from the consumers at the point of sale and then transfers it to the government. The business that is liable for paying sales tax has the responsibility of passing it to the government. 

Sales taxes are indirect taxes and can differ from state to state according to their needs. The state uses the money collected from the tax for the well-being of its residents.

You can calculate sales tax by multiplying the tax rate by the cost of the product. It can give you the post-tax amount of the product. However, if you want to know the pre-tax price of a commodity or the amount of tax you paid for it, you can compute sales tax in reverse.

In other words, computing sales tax in reverse will help you in distinguishing between your income from the sales and the amount you need to pay as sales tax. 

How To Compute Sales Tax In Reverse?

You can compute sales tax in reverse to know the pre-tax prices and the tax amount. If you are going through your receipts and want to know how much you earned and must pay or have paid as tax, you can compute sales tax in reverse. 

However, to compute sales tax in reverse, you must know the total receipt or the post-tax price of the commodity and the tax rate of it. Since the sales tax can differ in different states, you must know the right tax rate in the area you sold the commodity to calculate the correct tax amount. It will be useful while filing tax returns.

Now, if you have enough data, you can compute the sales tax in reverse. All you have to do is divide the total receipt or the post-tax price by 1 plus the tax rate in that area. Now, let us understand this with the help of an example.

The Formula And Example

You can use the following formula to compute the sales tax in reverse.

Pre-tax price = Post tax price (Total receipt) / 1 + Tax Rate

Now, to compute the pre-tax price and the amount you need to pay as tax, you have to replace the formula with the data you have. 

For instance, let us take the total receipt as $100 and the tax rate as 5% and compute the reverse sales tax.

First, we will need the pre-tax price, which we can subtract from the post-tax price to get the tax amount. 

Pre-Tax Price = 100 / 1 + 5%

                       = 100/ 1.05

                       = 95.23

The pre-tax price of the commodity is $95.25. It is the price without tax. Now, to find out the amount we paid as sales tax, let us do the deductions as mentioned above.

Sales Tax Amount = Post Tax Price – Pre Tax Price

                              = 100 – 95.23

                              = 4.77 

So, after computing the sales tax in reverse, we got the pre-tax amount ($95.23) as well as the sales tax amount ($4.77).  However, doing this calculation with big numbers all by ourselves and without a computing system could be a frustrating task. 

If you do not want to crunch all the numbers by yourself, you can always use the reverse sales tax calculator. It will save your time, energy, and all the hardships you may have to face while calculating the numbers.