A Sales Tax Calculator
for Booksellers

Guest Post By Mike Mould
November 30, 2012

Business owners need a sales tax calculator that is so simple it can be used to comply with the small business tax laws of every state.

In a discussion with another online bookseller, I learned that he did not know how to properly calculate the retail sales tax he paid for book sales in his state.

This made me wonder how many other online booksellers were overpaying their retail sales tax. So I contacted a few more colleagues and learned that almost all of them were either overpaying their state sales taxes, 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, a lawyer, or some other expert on Internet tax law.

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 state sales tax obligations from discussions with accountants about my own profitable part time businesses and I am passing them on to you as my opinion only about small business tax law.

Calculating Your Home Based Business Tax

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 about profitable home based businesses with average revenues per sale:

  1. Total Payment Received = $10.00
  2. State Retail Sales Tax Rate = 6.5%

After beginners file for a small business tax ID, the sales tax calculator 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 used 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 sales tax calculator:

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 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 mandated Internet 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. The difference in payment goes straight to your bottom line pre tax profit.

Don't Over Pay On Your Corporate Income Tax Return

Now, in this example, the difference between what the used 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 have $3,000 a year of in-state sales and your state has a 6.5% tax rate, your sales tax calculator would add up to an overpayment of your state retail sales tax of $11.90 per year.

This still doesn't amount to much, but the objective is to only pay the taxes that are legally owed, sell used books more profitably, and maximize the bottom line of your online bookselling business.

Every online bookseller that incorrectly calculates their in-state sales tax obligation is overpaying their taxes by a percentage equal to the state retail sales tax rate.

For example, if your state charges a 6.5% retail sales tax and you incorrectly calculate your tax payment as the booksellers I spoke with were doing, then you are paying 6.5% of your total bill too much.

I don't know many people that owe $10,000 in federal income taxes that are willing to pay another $650 just because they don't want to bother calculating their eCommerce sales tax obligation correctly.

Use Good Small Business Management Information

Sometimes, making using an inaccurate sales tax calculator can hinder your decision about whether or not to pursue bookselling as a full time income opportunity. I invite you to use this book selling info to make a wise choice.

Properly calculating your tax liability is an effective strategy to save money and represents a basic business management skill for the purpose of making your business profitable.

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 for yourself.

Even my spreadsheet program, "Bookkeeping for Booksellers" will calculate your obligation correctly.

And in the example cited above, you don't have to sell many used books before the tax savings will almost pay for the software in the first year alone.

In addition, I haven't even mentioned that you save time on taxes being prepared.

Furthermore, you 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. Only by hiring sales tax specialists can you get a better sales tax calculator.

This article was originally published in 2007 on the Online-Bookselling.com website and is republished here with permission.

* * * * *

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