Note: Compounding tax features are not activated by default. To get access to these free features, contact Green Bits support.
In some parts of California, you need to configure two different types of taxes in Green Bits: base taxes and compounding taxes. This example compares compounding taxes to base taxes, to help you understand the difference.
In this example, you have an item that is $10.00 before any taxes or discounts are applied.
|City sales tax of 5%||This is a Base Tax, which is not part of the compounding tax structure and is calculated on the $10.00 undiscounted, pre-tax starting price.||
$10.00 x 5% = $0.50
|State excise tax of 15%||This tax is part of the compounding tax structure and must be applied before any other compounding taxes.||$10.00 x 15% = $1.50|
|State cannabis tax of 10%||This tax is also part of the compounding tax structure, but must come after and must include the excise tax. The price of our item with the excise tax already applied is $10.00 + $1.50 = $11.50.||$11.50 x 10% = $1.15|
|Total price||After calculating all taxes in the proper order, each tax needs to be added to the base price to get the total price.||$10.00 + $0.50 + $1.50 + $1.15 = $13.15 total|
The order of compounding taxes is important
For compounding taxes, the order that the taxes are applied in can make a difference. Note that the Excise Tax should be applied first, followed by the State Cannabis Tax. Calculating these in a different order affects the final calculation:
- $10.00 x 5% = $0.50.
- $10.00 x 10% = $1.00.
- $11.00 x 15% = $1.65.
- $10.00 + $0.50 + $1.00 + $1.65 = $13.15 total.
Although $13.15 total is the same, note how the allocation of the two Compounding Taxes changed.
- With Excise Tax first, you are paying the state $1.50 in Excise Tax and $1.15 in Cannabis Tax.
- With Cannabis Tax first, you are paying the state $1.00 in Cannabis Tax and $1.65 in Excise Tax.
When you configure compound taxes, you can specify the order that the taxes are applied in.
Compare compounding taxes to base taxes
In contrast to compounding taxes, if you only had base taxes, Green Bits would calculate the tax rate by adding up the three tax rates and applying the total rate to the $10.00 starting price.
- 5% city sales tax + 15% state excise tax + 10% state cannabis tax = 30% total tax.
- $10.00 + 30% = $13.00 total.