Some calculations for how retailers handle sales tax.

Calculations to disguise sales tax

The calculations retailers can use to deal with sales tax are several. I will detail a few here only because math is not everyone's strong suit.

Let's use some simple examples, build it up, and finally break down how someone could disguise sales tax by burying it into a new price.

OK, let's assume you are a retailer that operates in Ontario, Canada. For now our GST rate is 5% and our PST or RST rate is 8%.

GST = 5% or 5 cents on the dollar
PST = 8% or 8 cents on the dollar
Our new Harmonized Sales Tax (to date) = 13%

When some people want to compute a total price for an $2.00 item with GST they often do the following with a calculator unfortuately:

$2.00 + 5 % and the answer is $2.10

I say unfortunately because this use of a calculator has removed the thinking involved.

There are two better ways to calculate this so you can start 'thinking' about what is actually going on. Remember I said 5 cents on the dollar... that's 5/100 or .05

The first, basic way, is $2.00 * .05 = ? + $2.00 = ?? (It's $2.10)

Forgive the quick Algebra inserted here. It is for those who want to know. Take the same equation above...
$2.00 * .05 = ? + $2.00 = ??
Actually 2 * .05 = x and x + 2 = y
So it follows that x = y - 2 correct?
And we also know that
x = 2 * .05 , therefore...
y - 2 = 2 * .05 since they both equal x right?
Now ADD 2 to both sides of the equal sign... still equal right?
y = 2*.05 + 2 , now we factor the 2 on the right hand side...
y = 2*(.05 + 1) , or to put it another way...
y = 2 * 1.05 , and lo and behold your total with tax is $2.10

The second, better way, is $2.00 * 1.05 = $2.10 (as explained above).

So first believe that tax isn't magical, then understand that it's just simple math, then do the math, even with a calculator, a better way so you can be in control!

Now let's do a little simple reversal to hide sales tax.

Let's say the posted price is $4.00. So the non-member shopper will have to pay 4.00 * 1.05 = $4.20 and the shop keeper needs to remit $0.20 to the government.

Now the same item is still at $4.00 but it is being purchased by a PayNoSalesTax member. The member pays $4.00 and the shop keeper will actually be selling the item for 4.00 / 1.05 = 3.81 and will remit the difference of $0.19 to the government.

That's why knowing how to compute tax better means you can do such tricks.

Here is another way that the shopper may effectively pay no sales tax.

Say the item is again $4.00. The sale to the shopper rings in at $4.20. The shop keeper has the $.20 to remit to the government when the time comes. In this case, the storekeeper offers the shopper a store credit of $.20 or will pay the $.20 back in cash. Such practices should be posted by the store keeper in order to avoid upsetting members.

How the sales tax is handled is up to the store keeper and needs to be compatible with whatever can be done using their cash registers.

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