Sales Tax vs VAT

Frequently asked questions

What's the actual difference between sales tax and VAT?

Sales tax is a single-stage tax collected only on the final sale to the end consumer — businesses buying for resale are typically exempt. VAT (value-added tax) is collected at every stage of production and distribution, with each business reclaiming the VAT it paid on its own inputs, so only the "value added" at each step is taxed net. The end consumer ultimately bears the full amount either way, but VAT is collected in pieces along the supply chain instead of all at once at the register.

Why does a $100 price tag mean two different things?

Convention, not math. US sales tax is usually quoted and displayed before tax, then added at checkout — a $100 sticker at 20% tax becomes a $120.00 total. VAT is typically required to be shown tax-inclusive on consumer prices, so a $100 VAT sticker at the same 20% rate is already the full checkout total — but $16.67 of that $100 is tax, meaning the seller's actual pre-tax price was only $83.33.

Does that mean VAT-inclusive pricing is cheaper?

No — it's the same rate applied to a different base, displayed differently. A sales-tax sticker shows the pre-tax price and adds tax on top; a VAT sticker shows the post-tax price with the tax already folded in. Comparing the two checkout totals directly is misleading unless you know which convention each price is using.

How do I back the tax amount out of a VAT-inclusive price?

Divide the price by (1 + rate/100), the same formula used to extract tax from a tax-included receipt total. For a $100 price at 20% VAT: 100 ÷ 1.20 = $83.33 pre-tax value, so $16.67 of the $100 is tax — not $100 × 20% = $20, which overstates it because that 20% would apply to the pre-tax value, not the tax-inclusive sticker price.