Expert: Arthur Naman - 4/17/2009

Question
QUESTION: When doing accounts payable and you take a purchase discount on an invoice do you calculate sales tax on the discounted total or the original amount?

ANSWER: What do you mean by "purchase discount"?

Typically if there is a purchase discount, the seller would take that into consideration when issuing the invoice. You would than pay the total.

If the discount is for paying on-time or early, then I think you should take the discount off the total. This often shows up as "2% net 30" which means take a 2% discount if paying within 10 days or pay the total invoice within 30 days.

If this is not the information you are asking about, please ask a follow-up question.




---------- FOLLOW-UP ----------

QUESTION: The purchase discount is like your example 2% net 30. Yes, I agree this amount comes off the total now which total do you pay sales tax on. The original invoice amount or the discounted amount?

ANSWER: It is probably the discounted amount.

 For example:
Cost $100
discount 20%
Discounted price is then $80.
Sales tax (again an example) 5% = $4.00
So the total is $84.00
Then 2% 10 net 30.
$84 x 2% ($1.68) = $82.32

Normally it is the seller who calculates sales tax, is there a question about the seller's sales tax calculation?


---------- FOLLOW-UP ----------

QUESTION: My question is not exactly like your answer. Here is my example; you receive your invoice -

Product $100.00
Sales tax 8% = $8.00
Total due = $108.00

Now you are offered 2% 10 Net 30
You take 2% off the product cost (you cannot take a discount on sales tax or freight)
$100.00 x 2% = $2.00
your product now cost $98.00 since you are getting the product at a lesser price would this not be the total that sales tax should be calculated on?
At the time the invoice is figured it is not known if you will be able to take the offered discount.

Answer
Consider the following:

2% discount off the product cost then calculate the invoice:
$100 - 2% = $98.00
S/T    8% =  -7.84
Total      $105.84   


2% off the total invoice:
Total invoice    $108.00
less 2% discount   -2.16
Net          $105.84

The net is the same either way. Calculating the sales tax on the invoice total less the 2% discount equals the same amount as taking the 2% discount on the total purchase price less the 2% discount.

It is not that you are getting a discount on the sales tax, it is that the sales tax is calculated on a discounted amount.