How to Calculate Reverse Tax

Many state and local governments levy a sales tax. Often, this can be a primary source of revenue for government activities. Most merchants pass the cost of sales tax on to the consumer by adding the tax to the cost of merchandise. But if, as a merchant, you sell merchandise on a tax-included basis, you will need to calculate sales tax in reverse. Merchants that handle product returns without a point-of-sale system also use this calculation to recover taxes already paid, in the form of tax deductions.

Instructions

1. Add the applicable state and local sales tax rates. This is the sales tax rate that the merchandise was subject to.

2. Add 1 to the sales tax rate, expressed as a decimal, to get the reverse-tax working figure.

3. Divide the total invoice price by the reverse-tax working figure. This is the portion of the invoice that constitutes the price of the merchandise.

4. Subtract the price of the merchandise from the total invoice price. This is the total reverse tax, or sales tax paid on the price of the merchandise.

5. Multiply the price of the merchandise by each individual state and local sales tax rate to determine what portion of the total reverse tax is due to each municipality and state government. These are also the amounts of sales tax deductions that can be claimed to recover sales tax on returned merchandise from each governing body.

Tips & Warnings

• A reverse sales tax audit by a tax professional can help identify and recover overpaid sales tax.

References

• CSG Network: Sales Tax Calculator And De-Calculator
• Arizona Tax Specialists Inc: Reverse Sales Tax Audits & Refund Claims
• “Individual Income Taxes, 2010 Edition”; William Hoffman, James E. Smith, Eugene Willis; 2010