Rounding Discounts and Sales Tax
Date: 03/20/2002 at 20:01:12 From: Nilla Salgueiro Subject: Rounding discounts and sales tax I wonder why the math book that I teach from states the following: When computing sales tax always round up before adding on to the price. Ex: 14.9305 rounds to 14.94. When computing discounts always round down before subtracting from the original price. Ex: 3.9975 round to 3.99. This seems confusing to the students. Why can't you follow rounding rules?
Date: 03/20/2002 at 23:26:28 From: Doctor Twe Subject: Re: Rounding discounts and sales tax Hi Nilla - thanks for writing to Dr. Math. In most states, businesses are free to round taxes (and discounts) any way they want to. The State simply computes the sales tax the business owes the State based on total gross sales - not on actual "sales tax collected." Most businesses, however, round as your book suggests so that the business never gets "shortchanged." In fact, they are likely to "over collect," and they keep the difference. As a simple example, suppose we have a 5% sales tax and 100 people come in and buy a $.48 item. Using the "conventional" rounding rules, each of the 100 customers would be charged a sales tax of: $.48 * 5% = $.48 * .05 = $.024 --> $.02 For 100 customers, that totals: 100 * $.02 = $2.00 The State, however, sees gross sales of: 100 * $.48 = $48.00 and charges the company: $48.00 * 5% = $48.00 * .05 = $2.40 So the company has to pay the state $2.40 but only collected $2.00 in sales tax. The company loses $.40 in the process. On the other hand, using your book's rounding rules, if 100 people come in and buy a $.48 item, each of these customers would be charged a sales tax of: $.48 * 5% = $.48 * .05 = $.024 --> $.03 For 100 customers, that totals: 100 * $.03 = $3.00 The State still sees gross sales of: 100 * $.48 = $48.00 and charges the company: $48.00 * 5% = $48.00 * .05 = $2.40 This time, the company *gains* $.60 instead! Similar logic applies to the discount situation; rounding down always gives the company the extra fractional cent, assuring that they're not "shortchanged." I hope this helps. If you have any more questions, write back. - Doctor TWE, The Math Forum http://mathforum.org/dr.math/
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