What is the difference between a tax group and a compound tax?

Tax Group

A Tax Group is a combination of multiple independent taxes that are applied to the same base amount. Each tax in the group is calculated separately on the original price and then added together to get the total tax amount.

Suppose you have an item priced at $100 and the following taxes apply:

• State tax: 5%
• Federal tax: 10%

Calculations:

1. State tax = 5% of $100 = $5
2. Federal tax = 10% of $100 = $10
3. Total tax = State tax + Federal tax = $5 + $10 = $15
4. Final price = $100 (original price) + $15 (total tax) = $115

Compound Tax

Whereas a Compound Tax is where one tax is applied on top of another tax. This means the second tax is calculated on the amount that includes the first tax.

Imagine you are purchasing an item with the following taxes applied:

• A state tax of 5%
• A federal tax of 10% (which is a compound tax)
• Item price before any taxes is $100.

Calculation of the state tax:

State tax = 5% of $100 = 0.05 * $100 = $5

The price after the state tax = $100 + $5 = $105

Calculation of federal tax on the new price (which includes the state tax):

Federal tax = 10% of $105 = 0.10 * $105 = $10.50

The final price after the federal tax = $105 + $10.50 = $115.50

So, the final price you pay is $115.50, where, the federal tax is applied on the amount that already includes the state tax.