USA Tax/Margin Question

[wmccourt]

Good Morning,

I just have a quick question and I apologize if this information is posted somewhere (I didnt see anything).

We are a construction company in South Carolina. We are currently trying to figure out if our systems are calculating our taxes and margins correctly.

We currently pay taxes on materials purchased for our retail jobs (jobs for homeowners).

In our estimate today, our system is calculating our cost for the estimate as follows:
Material cost (without tax) + tax rate (avg is 8.5%) = total material cost. It then puts our markup on that of 40% (material cost w/ tax + margin).

We are finding our competitors are calculating it this way:
Material cost (without tax) + 40% margin = total
Total tax based on material purchase + margin total = cost.

Which is the proper way?

Example 1:
Material = $1860 (without tax)
Tax (8.5%) = 158.10
Subtotal = $2,018.10
+40% margin = $3,363.57

Example 2:
Material = $1860 (without tax)
+40% Margin = $3,100
Tax on material=$158.10
Total cost =$3,258.10

Thank you!

 

[kirby]

Your pricing charges the customer for margin on the tax. More bucks for you if customer accepts your proposal but makes your proposals less competitive.