A compound tax is a tax that will be calculated when you add additional taxes to an item on top of the primary tax. Here, tax is calculated on the amount including the previous tax.
Imagine you are purchasing an item with the following taxes applied:
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.
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