General > General Technical Chat
"FU^%ING" Credit-Cards!!!
Rick Law:
Disclaimer first: this is my personal opinion and from my experience only. It is not from a tax professional. I am not a lawyer, not a CPA, and not a licensed tax professional.
With that out of the way, this is how I understand it (from doing my own tax for years which means having the read those Form XXXX instructions from IRS and State).
Tax is calculated based on the value of the transaction. Discount reduces the value of transaction.
You purchased a car at the dealer. You managed to negotiate the price down to $40,000. Tax is on the value of the transaction. The transaction is $40,000. That's the amount that is taxed.
The price the dealer wanted never comes into play. He might have wanted to sell it for $100,000. That means you save $60,000. But, that $60,000 was merely someone's desire, and did not become part of the transaction -- hence it is not included in the transaction value to be taxed. He might have wanted to sell it for $200,000. You might have "saved" $160,000. It is irrelevant. It is not part of the actual transaction.
One time a decades ago, I failed to get the car dealer to lower it further. So, I asked for another $1000 for my trade-in car. The sales clerk throw it back in my face and said then this new car is going to go up $1000. My mind clicked and I said "fine" then I ask for another thousand more for my trade in, and the new car went up another $1000; I just told him I want to feel good that I trade-in that car at a very good price, and ask for more for my trade-in again. In that State and at that time, trade-in applies as directly subtracting from the transaction. Every extra $1000 my trade-in is worth is $1000 less in the new car. That is $1000 less value in the transaction, and that is $1000 less I have to pay tax in. Within reason of course, and staying in good faith with complying with the law of course. I really would not want to stand before a tax auditor trying to justify that my 10 year old junk is worth 90% of when it was a new car. Being charge with tax fraud would not be fun, so, within reason only.
Applying the discount first gets us to the actual transaction value. That is why discount is always applied before tax.
Rebate from your seller (or the Credit Card company whom processed the transaction on behalf of the seller) is a post-facto discount. (Exception is healthcare insurance rebates... That one is a rat's nest which may be governed by different State laws. In some States, the resurrected the awful Obama Care mandates and penalty. Health Insurance is a mess these days)
When they promise you a rebate of 1%, they based that 1% on the total post-tax amount. Their lazy math and their vague attempt to exaggerate the value of their rebate.
Only folks at this forum would have the minds to think about pre- verses post- tax implications. Most others would just think... ah 2% back = 2% less = 2% discount.
They could have based that on a pre-tax basis, but they would need to do a lot of work. Excise Tax Local, excise tax State, Federal excise tax, Sales tax State, Sales tax local, ahh... a mess.
In either case: the value of the transaction has been taxed, so neither IRS or State Treasury has a bone to pick with you. The tax duty was satisfied.
SilverSolder:
Because the credit card gives you 1% back of the full payment including taxes etc., it is actually equivalent to getting slightly more than a 1% discount on the price of the original item.
E.g. take our $100 item, with 6% tax ($6), you pay $106.
Now, the credit card company gives you $1.06 back (1% of the $106)
So your discount on the $100 item is actually 1.06%, not just 1%!
Rick Law:
--- Quote from: SilverSolder on June 30, 2020, 12:22:36 pm ---
Because the credit card gives you 1% back of the full payment including taxes etc., it is actually equivalent to getting slightly more than a 1% discount on the price of the original item.
E.g. take our $100 item, with 6% tax ($6), you pay $106.
Now, the credit card company gives you $1.06 back (1% of the $106)
So your discount on the $100 item is actually 1.06%, not just 1%!
--- End quote ---
Your math is right, but your last line (conclusion) is questionable: depends on perspective. Denominator at that point is no longer $100 but $106 because $106 is your payment. So you are still at 1% discount of your payment.
In any event, when the percentage discount is the same percentage as money back, apply now or later doesn't matter. It will cost you the exact same amount. Some simple algebra will prove that:
Money back case, your total cost is:
(N*1.06) - (N*1.06)*0.01; // the second term is the money back.
Percent discount case, your total cost is:
(N*(1-0.01))*1.06; // (N*(1-0.01)) is post-discount amount.
Both evaluate to N*1.06*0.99, you spend exactly the same.
The difference is merely spending extra and get the extra back, verses not spending the extra and keeping it in your pocket.
However, the comparison is if one gets a higher saving with cash-discount vs % money back.
Earlier you replied that you get a 4 cents discount per litre of gas.
- If it is $1 per litre and you get 4 cents discount, that is a 4% discount. 4x the 1% money back.
- If it is $5 per litre and you get 4 cents discount, that is a mere 0.8% discount. 1% money back would be a better deal.
SilverSolder:
--- Quote from: Rick Law on June 30, 2020, 11:35:54 pm ---
--- Quote from: SilverSolder on June 30, 2020, 12:22:36 pm ---
Because the credit card gives you 1% back of the full payment including taxes etc., it is actually equivalent to getting slightly more than a 1% discount on the price of the original item.
E.g. take our $100 item, with 6% tax ($6), you pay $106.
Now, the credit card company gives you $1.06 back (1% of the $106)
So your discount on the $100 item is actually 1.06%, not just 1%!
--- End quote ---
Your math is right, but your last line (conclusion) is questionable: depends on perspective. Denominator at that point is no longer $100 but $106 because $106 is your payment. So you are still at 1% discount of your payment.
--- End quote ---
From a "simple buyer" perspective, buyer is getting a straightforward 1% discount on the total payment.
From the state tax authority perspective, no discount at all was given on the $6 sales tax - the state tax authority collects the full $6.
Now the important bit: no part of the 1% cash back that buyer received came from the $6 paid in tax. The 1% cash back was entirely funded from proceeds from the $100 part of the transaction that seller controls.
From seller's perspective, therefore, the cash back is 1.06% (and seller actually has to pay that, it is included in the merchant fees charged by the credit card company).
The Buyer can actually choose to look at the transaction two ways:
(1) I got 1% cash back on the whole transaction including tax, or
(2) I got 1.06% cash back on the item pre tax price, and paid 6% sales tax as is usual in my state
Now comes the crunch:
If buyer can deduct the sales tax somewhere (for example, buyer runs a small business) then the 1.06% is actually the correct discount received!
--- Quote ---Earlier you replied that you get a 4 cents discount per litre of gas.
- If it is $1 per litre and you get 4 cents discount, that is a 4% discount. 4x the 1% money back.
- If it is $5 per litre and you get 4 cents discount, that is a mere 0.8% discount. 1% money back would be a better deal.
--- End quote ---
That may have been someone else's post - In this case, I would say you should double dip! I.e. buy gas station gift cards with your credit card and get immediate cash back on that transaction. Then use the gift card at the pumps and enjoy discounted gas as well, since the gas station gift card counts as cash when buying the gas! I usually manage 5% - 10% discount overall, by this method. 8)
Doing all these little things adds up to thousands each year. Which I then spend on wine, women, and song! :D
Rick Law:
--- Quote from: SilverSolder on July 01, 2020, 12:41:12 am ---...
...
Now comes the crunch:
If buyer can deduct the sales tax somewhere (for example, buyer runs a small business) then the 1.06% is actually the correct discount received!
...
...
Doing all these little things adds up to thousands each year. Which I then spend on wine, women, and song! :D
--- End quote ---
I agree with all your points in that reply. I particularly like your "Now comes the crunch"... I totally missed deductions angle. It may be fun to research that sometime.
As to the second point quoted. "...[Saving] adds up to thousands each year..." Good going! I'm impressed.
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