Adding tax vs. removing tax
The reverse calculation is the one people get wrong. If a receipt says $108.25 including 8.25% tax, the tax is not 8.25% of $108.25 ($8.93). It is $108.25 ÷ 1.0825 = $100.00, so the tax is $8.25. Subtracting a percentage is not the inverse of adding it — a mistake that quietly distorts a lot of expense claims and invoices.
US sales tax, VAT and GST are not the same thing
US sales tax is charged once, at the final retail sale, and is added at the register — which is why American prices on the shelf look lower than the amount you pay. Rates are set by state, county, city and sometimes special districts, so a single address can stack four rates together and end up anywhere from 0% to over 11%.
VAT (Europe, UK) and GST (Canada, Australia, India, New Zealand) are charged at every stage of production, with businesses reclaiming what they paid on inputs. Displayed prices are normally tax-inclusive, which makes the reverse calculation above the one you need most often.
Who has to charge it, and where
For shoppers, sales tax is a line on a receipt. For anyone selling, it is a compliance question with a specific trigger word: nexus — the connection that obliges you to collect tax for a given jurisdiction.
- Physical nexus comes from an office, warehouse, staff or stored inventory in a state.
- Economic nexus comes from sales volume alone. Since the 2018 South Dakota v. Wayfair decision, most US states require out-of-state sellers to collect once they pass a threshold — commonly $100,000 in sales or 200 transactions a year.
- Marketplace facilitator rules shift the obligation to the platform. If you sell through Amazon, Etsy or eBay, the marketplace generally collects and remits on your behalf.
- Destination sourcing. Most states tax at the buyer’s address, not the seller’s, which is why a single order can involve state, county, city and special-district rates stacked together.
Outside the US the equivalent questions are VAT and GST registration thresholds, and the EU’s One Stop Shop scheme for cross-border digital sales. In every case the rate depends on where the customer is, the product category, and the date — rates change more often than most people expect.
None of this is tax advice. If you sell across borders, the amounts get large quickly and a specialist is cheaper than a correction.
Exemptions, and why the same item is taxed differently
Sales tax is rarely a single rate applied to everything. What is taxable, and at what rate, varies by product category in ways that can seem arbitrary until you know the underlying policy.
- Groceries. Many US states exempt unprepared food entirely or tax it at a reduced rate, on the grounds that a flat tax on necessities is regressive. Prepared food from the same shop is usually taxed in full.
- Clothing. Some states exempt it outright; others exempt it below a price threshold, so a $100 coat may be taxable while a $99 one is not.
- Prescription medicine is almost universally exempt; over-the-counter medicine frequently is not.
- Digital goods. Rules for software, ebooks and streaming vary enormously and have changed repeatedly in the last decade.
- Sales tax holidays. Several states suspend tax on school supplies or emergency equipment for a few days each year.
The UK does something similar with VAT: most food is zero-rated, but chocolate biscuits are standard-rated while chocolate cakes are not — a distinction litigated all the way to a tribunal over Jaffa Cakes. The lesson everywhere is the same: check the category, not just the rate, and check the current year.
Practical notes
- Discounts come first. Tax is charged on the discounted price, so apply the coupon before the rate.
- Not everything is taxable. Many US states exempt groceries, prescription medicine and clothing below a threshold; the UK zero-rates most food and children's clothes.
- Shipping is taxable in some jurisdictions and not others.
- Where the tax is due is normally the buyer's address for online sales, not the seller's.
For anything with legal consequences, check the current rate with the relevant tax authority — rates change more often than people expect.