Home > Other > Taxes > Concepts > Tax Plans
The standard method of defining a tax rate in the US is to set up tax plans. Using tax tables rather than a flat “17.5%” rate lets you set the rounding of tax amounts explicitly. It also allows you to specify ranges which are tax-free and tax amounts which are higher at the start and then use a tax rate for higher amounts.
A tax plan contains a series of entries defining a range – the start amount, the end amount and the cumulative tax on the range – and some indication of which entry or entries to repeat.
(This approach comes from back in the day, the state or federal tax authority would set up a series of charts or cards with these ranges on and the merchant would simply look up the amount within ranges and then charge the specified amount of tax. The repeat ranges are necessary so that the tax authority does not have to define a range for every possible taxable amount. When POS applications and tax tables were computerised they created database tax tables that mimic these cards.)
Examples
To define a tax plan equivalent to a 10% tax rate, with no tax charged on the first 4 cents (because we round down 0.4 to 0), you could set up the tax plan as follows:
Band |
From Range |
To Range |
Tax On Range |
Cumulative Tax |
1 |
0.00 |
0.4 |
0.00 |
0.00 |
2 |
0.05 |
0.14 |
0.01 |
0.01 |
3 |
0.15 |
0.24 |
0.01 |
0.02 |
Lets look at a more complex example with a repeating set of entries.
Band |
From Range |
To Range |
Tax On Range |
Cumulative Tax |
Repeat |
1 |
0.00 |
1.00 |
0.20 |
0.20 |
No |
2 |
1.01 |
2.00 |
0.30 |
0.50 |
No |
3 |
2.01 |
5.00 |
0.45 |
0.95 |
Yes |
4 |
5.01 |
6.00 |
0.60 |
1.55 |
Yes |
5 |
6.01 |
10.00 |
0.45 |
2.00 |
Yes |
Let's look at these rates more closely. There area view things we need to note to fully understand the calculations below. The repeat range starts at $2 (From Range of first repeat) and goes to $10 (To Range of last repeat). This gives a total repeat range of $8.00. The tax for each of the bands in this repeat range is (0.45 + 0.60 + 0.45) = $1.50. So for every $8 there will be $1.50 tax.
Lets look at some example's of how these rates are used to calculate tax on a sales value.
Sales Amount |
Tax |
Comment |
$0.50 |
$0.20 |
Used band 1. |
$1.50 |
0.20 + 0.30 = $0.50 |
$1.50 falls within Band 2, which has a cumulative tax on $1.50. |
$2.50 |
0.20 + 0.30 + 0.45 = $0.95 |
$2.50 falls within Band 3, which has a cumulative tax on $0.95. |
$5.50 |
0.20 + 0.30 + 0.45 + 0.60 = $1.55 |
$5.50 falls within Band 4, which has a cumulative tax on $1.55. |
$9.99 |
0.20 + 0.30 + 0.45 + 0.60 + 0.45 = $2.00 |
$9.99 falls within Band 5, which has a cumulative tax on $2.00. |
$10.01 |
0.20 + 0.30 + 0.45 + 0.60 + 0.45 + 0.45 (repeat) = $2.45 |
$10.01 falls outside the bands. We take the tax up to the last band $2.00. We then go to the first repeat band which gives us an extra $0.45. Total $2.45 |
$16.35 |
2.00 + 1.50 = $3.50 |
$16.35 falls outside the bands. We take the tax up to the last band $2.00. We still have $6.35 left. We go back to the first repeat band. This band has a coverage of $3 ($2.01 -> $5) and tax of $0.45. We still have $3.35 left to tax. So we go to the next band. This has coverage of $1 and tax of $0.60. We still have $2.35 left to tax. This falls within the coverage of the next repeat band, so that's another $0.45. So we have 2.00+0.45+0.60+0.45 = $3.50. Looking a little complicated isn't it? Read below for detail on how to make this easier to understand. |
Those repeat bands can be a little confusing. It helps if you think of them as their own little set of tax plans, like this:
Set 1
Band |
From Range |
To Range |
Tax On Range |
Cumulative Tax |
1 |
0.00 |
1.00 |
0.20 |
0.20 |
2 |
1.01 |
2.00 |
0.30 |
0.50 |
3 |
2.01 |
5.00 |
0.45 |
0.95 |
4 |
5.01 |
6.00 |
0.60 |
1.55 |
5 |
6.01 |
10.00 |
0.45 |
2.00 |
Set 2
Take the repeat bands and reset them to start from zero. The From Range of the first band was $2.01 so subtract $2 from all the From /To Range values to reset back to zero.
Band |
From Range |
To Range |
Tax On Range |
Cumulative Tax |
1 |
0.01 |
3.00 |
0.45 |
0.45 |
2 |
3.01 |
4.00 |
0.60 |
1.05 |
3 |
4.01 |
8.00 |
0.45 |
1.50 |
So for the first ten dollars we use Set 1 to calculate tax. Then we move to Set 2 to calculate the tax on each multiple of $8 or part there of. If we take the example of $16.35 above, we would go to Set 1 first, Band 5 to get out tax of $2 on the first $10. Then we go to Set 2 and use Band 3 to get the tax $6.35 of $1.50.
Let's go further and calculate tax on $100.
Tax on first $10.00 (Set 1 Band 5) = $2.00
Now move to Set 2 for further calculations.
Still have $90 sales to tax.
Set 2 covers a range of $8 (there is that repeat range mentioned above!)
Find out how many times the repeat range goes into $90.00. $90 / $8 = 11.
Tax on the repeat range was $1.50 so that's tax of 11 x $1.50 = $16.50
We just calculated tax on 11 x $8 = $88. We still have $90 - $88 = $2 sales left to tax.
Go back to set 2. Look for the band that the $2 falls within. That's Band 1, so that's tax of $0.45
Total Tax - $2.00 + $16.50 + $0.45 = $18.95
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