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Discounts and sales tax

In most jurisdictions, sales tax is calculated on the taxable sale price of goods or services. Discounts can impact this taxable base, potentially lowering the amount of sales tax collected. However, the impact depends on the type of discount and how tax rules treat it in the relevant jurisdiction.
  • Seller-funded discounts generally reduce the taxable sale price.
  • Vendor-funded discounts often do not reduce the taxable sale price, as they are considered a reimbursement to the seller rather than a true price reduction.
  • The tax effect can vary by state or country.
Our API supports two distinct discount types, each with different tax implications.

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Taxwire API

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Seller-Funded Discount

discount_amount in the api call body
  • Definition: A discount offered directly by the seller, reducing their own margin.
  • Funding: Paid for entirely by the seller. No third-party reimbursement.
  • Tax Treatment:
    • For tax purposes, this discount is almost always treated as a true reduction in the taxable sale price.
    • The tax base is lowered by the discount amount.
Example: 
{
  "discount_amount": 10.00
}
If the original taxable price is $100 and the seller applies a $10 discount:
  • Taxable sale price = $90
  • Sales tax is calculated on $90.

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Vendor-Funded Discount

vendor_discount_amount in the api call body
  • Definition: A discount offered by the seller’s supplier (vendor) but applied by the seller at the time of sale.
  • Funding: The vendor reimburses the seller for the discount, so the seller’s margin is unaffected.
  • Tax Treatment:
    • In most US states, this discount does not reduce the taxable sale price, because the seller is reimbursed.
    • Viewed as a profit transfer from vendor to seller, not a true reduction in retail price.
    • Some states do allow the taxable base to be reduced by this discount.
Example: 
{
  "vendor_discount_amount": 15.00
}
If the original taxable price is $100 and a $15 vendor discount is applied in a state that does not allow it to reduce taxable price:
  • Taxable sale price = $100
  • Sales tax is calculated on $100, even though the customer pays $85.

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Multi-Merchant Transactions

When processing transactions involving multiple merchants (vendors) but one invoice:
  • Tax Calculation:
    • Assigning discounts to the correct line items is critical for determining the correct taxable amounts and jurisdictions.
    • Since there is only one customer per invoice, discounts won’t affect which jurisdictions get the tax — only how much tax is collected.
  • Order-Level Discounts:
    • The type of discount (discount_amount vs. vendor_discount_amount) determines the tax treatment, not which vendor offered it.
    • An unassigned discount is treated according to the tax rules of the most taxable item on the invoice.
  • Tax Responsibility:
    • In a marketplace model, the marketplace (as retailer) is responsible for tax remittance.
    • Vendor identity does not change who remits the tax.
    • The main risk is that order-level discounts can lead to customers overpaying tax if applied incorrectly.