Sales Tax, VAT and GST Explained: How to Calculate Each
Whenever you buy something, part of the price you pay may go to the government as a consumption tax. Depending on where you live, that tax is called sales tax, VAT (value-added tax) or GST (goods and services tax). They work differently behind the scenes, but the arithmetic you need as a shopper, freelancer or small-business owner is nearly identical. This guide explains the differences and the formulas.
Sales tax
Sales tax is charged once, at the final sale to the consumer, and is added at the register. It is used in the United States, where the rate varies by state and often by county and city. Because it is applied only at the point of sale, a business that buys goods to resell normally does not pay it (it holds a resale certificate).
VAT (value-added tax)
VAT is used in the European Union, the United Kingdom and many other countries. It is charged at every stage of the supply chain on the value added at that stage. Each business charges VAT to its customer and can reclaim the VAT it paid on its own purchases, so in the end the tax is borne by the final consumer. Prices in shops are usually shown VAT-inclusive.
GST (goods and services tax)
GST works like VAT and is used in countries such as Australia, Canada, India, New Zealand and Singapore. Some countries have several layers (federal and state or provincial GST or HST), and rates can differ by type of goods.
| Sales tax | VAT / GST | |
|---|---|---|
| When it is charged | Only at the final sale | At each stage of production and sale |
| Who can reclaim it | Not applicable to consumers | Registered businesses can reclaim input tax |
| Price shown in shops | Usually before tax | Usually including tax |
| Example places | United States | EU, UK, Australia, India, Canada |
How to add tax to a price
Total = price × (1 + rate ÷ 100)
An $80 item with 8.25% sales tax: tax = 80 × 0.0825 = $6.60, so the total is $86.60. A net price of 100 with 20% VAT becomes 120. The Sales Tax Calculator, VAT Calculator and GST Calculator all do this in one click.
How to remove tax from a tax-inclusive price
Net price = total ÷ (1 + rate ÷ 100), and tax = total − net price.
A gross price of 120 with 20% VAT: 120 ÷ 1.20 = 100, so the VAT is 20. A common mistake is to take 20% off 120, which gives 96 and is wrong. Always divide by 1 plus the rate.
Worked examples
- Restaurant bill in the US: $50 food with 7% sales tax and 20% tip on the pre-tax amount: tax $3.50, tip $10, total $63.50. Split it with the Tip Calculator.
- Freelance invoice in the UK: £500 net plus 20% VAT: VAT £100, invoice total £600.
- GST-inclusive receipt: a $220 total with 10% GST includes 220 − 220 ÷ 1.10 = $20 of GST.
Discounts and tax together
In most places tax is charged on the price after the discount. A $120 item at 25% off costs $90; with 8% tax the final price is $97.20. The Discount Calculator shows each step.
Tips for small businesses
- Check the registration threshold in your country. Below it, you may not have to charge VAT or GST.
- Keep tax invoices for all business purchases so you can reclaim input tax where allowed.
- Show tax as a separate line on invoices.
- Round tax at the line level or invoice level according to local rules and be consistent.
- Talk to an accountant. Rates, exemptions and rules for digital services and cross-border sales change frequently.
Common questions
Is tax charged on tax? Generally no; tax is calculated on the price, not on other taxes, though a few jurisdictions have exceptions.
Are groceries taxed? It depends. Many places apply a lower rate or zero rate to basic food, and higher rates to luxury goods.
Do the rates change? Yes. Always check the current rate from your tax authority before invoicing.
The percentage maths behind all of this is covered in our guide on calculating percentages. This article is educational and not tax advice.