Finance
Sales tax calculator
Two directions, and the second one is where the mistakes happen. Taking 20% off a gross price does not give you the net price.
The reverse calculation is not subtraction
Removing tax: net = gross ÷ (1 + r)
If a total of $120 includes 20% tax, the net price is $100, not $96. Subtracting 20% of the gross takes 20% of the wrong base — the tax was calculated on the net figure, so recovering it requires division, not subtraction.
The error grows with the rate. At 5% it is about 0.25% of the price; at 25% it is 5%. On an invoice run into the thousands, that is a genuine reconciliation problem, and it is one of the most common spreadsheet mistakes in small-business bookkeeping.
Sales tax, VAT and GST are not the same mechanism
US sales tax is charged once, at the final retail sale, and is normally quoted separately from the shelf price. Rates are set at state, county and city level and stack, so a single purchase can carry three or four components combined into one figure.
VAT and GST are collected at every stage of production, with businesses reclaiming the tax they paid on inputs. The net effect on the consumer is similar, but prices in VAT countries are generally advertised inclusive of tax — which is why the reverse calculation matters so much more there.
Rounding rules
Most jurisdictions require tax to be rounded to the nearest cent or penny per line item, though some permit rounding at the invoice total instead. The two approaches diverge on a multi-line invoice, and tax authorities generally expect consistency rather than whichever produces the lower figure.
Where a purchase covers multiple items at different rates — food and non-food in a single basket, for instance — each rate must be applied to its own subtotal. A blended rate applied to the whole basket will not reconcile.
Where the rate comes from
In the US, the applicable rate is normally determined by the destination — the buyer's address — rather than the seller's, for most states. Origin-based sourcing exists in a minority of states for intrastate sales. For online sellers, economic nexus rules mean tax may be owed in states where the business has no physical presence at all, based on sales volume thresholds.
Because rates change and local jurisdictions overlap, verify the current combined rate for the specific address rather than relying on a state-level figure.
Common questions
How do I work out the tax rate from a receipt?
Divide the tax by the net amount and multiply by 100. If the receipt shows $8.25 of tax on a $100 subtotal, the rate is 8.25%. If you only have the gross and the net, the tax is the difference.
Is shipping taxable?
It depends on the jurisdiction. Some tax delivery charges whenever the goods are taxable; some exempt separately stated shipping; some tax it only if the seller arranges carriage. It is one of the most inconsistent areas of sales tax, so check the specific state or country rule.
What is a tax-inclusive price?
A price that already contains the tax, which is standard practice in VAT and GST countries. To find the tax portion, divide by 1 plus the rate to get the net, then subtract. For 20% VAT, the tax is the gross divided by 6.