There is a common error almost all beginning business owners make when calculating gross receipts tax due. (In New Mexico, sales tax is called gross receipts tax.) When most people are calculating gross receipts tax, they look on their bank statement to find the total dollar amount of deposits and multiply that by the sales tax rate. This calculates a higher amount that what is actually due.
Why is this method incorrect? The total deposits to your bank account include the base sale amount plus the gross receipts tax. The number you need is the amount of the sales, not the amount of the sales plus the amount of tax.
To determine the amount of sales, you will need to divide total deposits by 1 + the gross receipts tax rate expressed as a decimal. The current tax rate in Albuquerque is 7.875%. The number you would divide into deposits is 1 + 0.07875 which equals 1.07875.
For example, let’s say you deposited a total of $10,000 in your bank account. To get total sales without gross receipts tax, you would run the following calculation:
Total Deposits / (1+ sales tax rate expressed as a decimal) = total sales without tax
10,000 / 1.07875 = $9,269.99
$9,269.99 is your total sales without gross receipts tax. This is the number you need to multiply by the tax rate to get gross receipts tax due. This is also the number you report on the CRS form to file your gross receipts tax report with the state.
CORRECT: Multiply total sales without tax by the tax rate
9,269.99 x 0.07875 = $730.01 = amount of gross receipts tax due
INCORRECT: Multiply total deposits by the tax rate
10,000 x 0.07875 = $787.50 = incorrect amount of gross receipts tax
$730.01 is the gross receipts tax due. This is lower than if you had performed the incorrect calculation and multiplied your total deposits by the tax rate. Saving money like this will keep your piggy bank feeling like a princess.
You can check your math by adding sales to tax and this will result in your total deposits.
IMPORTANT: If any of your sales are exempt from gross receipts tax, or if any of your deposits are not from taxable sales, the math will need to be adjusted.