How VAT and sales tax work: adding and removing tax correctly

Adding tax to a price is easy; taking it off is where people go wrong. The commonest mistake, subtracting the rate from a tax-inclusive price, undercounts the price and overcounts the tax every time. This guide explains how VAT, GST and US sales tax work, gives the correct formulas in both directions with worked examples, and covers the rounding and multi-rate cases that cause penny differences on invoices.

What VAT, GST and sales tax are

All three are taxes on spending rather than income. Value added tax (VAT) is used across Europe and much of the world; goods and services tax (GST) is the same idea under another name in Australia, New Zealand, Singapore, Canada and India. They are charged at each step of the supply chain, but businesses reclaim the tax they pay on their inputs, so in the end the whole tax is borne by the final consumer.

Sales tax, as used in the US, is charged once, when goods are sold to the end customer. States set the base rate and counties, cities and special districts can add their own. Prices on shelves are usually shown before sales tax, while VAT and GST prices for consumers are usually shown including tax.

Adding tax to a net price

To go from a price without tax (net) to a price with tax (gross), multiply by one plus the rate:

gross = net × (1 + rate) and tax = net × rate

Where two taxes apply to the same base, add the rates first. In Quebec the GST of 5% and the QST of 9.975% are both charged on the pre-tax price: on 80.00 that is 4.00 of GST plus 7.98 of QST, so the customer pays 91.98.

Removing tax from a gross price

To go back from a tax-inclusive price to the net price, divide by one plus the rate:

net = gross ÷ (1 + rate) and tax = gross − net

The same applies to discounts and markups: a percentage that was added to one base can’t be removed by subtracting the same percentage of a different base. Our percentages guide covers the general rule, and the percentage calculator handles reverse percentages.

The tax fraction shortcut

The share of a tax-inclusive price that is tax is rate ÷ (100 + rate). At 20% that is 20/120, or one-sixth, the “VAT fraction” familiar to UK bookkeepers. At 10% GST it is 10/110, one-eleventh, so the GST in an Australian receipt for 88.00 is 8.00. At 15% (New Zealand, South Africa) it is 15/115, or 3/23.

How VAT is collected along the chain

VAT is collected in instalments by each business in the chain. Suppose a wholesaler sells goods to a shop for 60.00 plus 20% VAT, and the shop sells them to a customer for 100.00 plus VAT:

• The wholesaler charges 12.00 of VAT and pays it to the tax authority.
• The shop charges the customer 20.00, reclaims the 12.00 it paid, and pays the difference of 8.00.
• The authority receives 20.00 in total: 20% of the final price, paid in two parts.

That is why a VAT-registered business looks at prices net of VAT: the VAT it pays on purchases comes back. A consumer, or a business that is not registered, cannot reclaim it and sees the gross price as the real cost. Cross-border business sales often use a reverse charge, where the buyer accounts for the VAT instead of the seller; the European Commission’s VAT pages explain the EU rules.

US sales tax

In the US, the rate at the register is the state rate plus any local rates. The state rate is the floor: our table stores state rates from each state’s revenue department, and local rates must be added for the exact address.

Many states exempt or reduce tax on groceries, prescription drugs or clothing, and businesses buying goods for resale usually give the seller an exemption certificate instead of paying tax. Because sales tax applies only once, the multi-stage reclaiming of VAT doesn’t arise.

Canada: GST, HST, PST and QST

Canada combines a federal 5% GST with provincial sales taxes in three ways. Some provinces harmonise them into a single HST (Ontario’s is 13%). Some, such as British Columbia, charge a separate provincial sales tax on top of GST. Quebec charges its own QST of 9.975% alongside GST. Alberta and the territories charge GST only. When removing tax, use the combined rate: a Quebec price including both taxes is divided by 1.14975.

Standard rates in selected countries

Standard rates from our sourced rate table, each read on an official authority page (checked 2026-10-07). Reduced and zero rates exist almost everywhere for items such as food, books or children’s goods; the UK, for example, has a 5% reduced rate and a zero rate. The full VAT rates page lists every country we cover.

Rounding: why invoices differ by a penny

Tax is usually calculated to more decimal places than a currency has, so it must be rounded, and it matters where. Take four items at 2.49 each before 20% VAT:

• Rounding each line: 2.49 × 0.20 = 0.498, rounded to 0.50; four lines give 2.00.
• Rounding the invoice total: 9.96 × 0.20 = 1.992, rounded to 1.99.

Both are a legitimate method in many systems, but they disagree by 0.01. Tax authorities say which methods are acceptable; for the UK, HMRC’s VAT Notice 700 sets out the rules. The VAT calculator lets you choose rounding per line or on the total so you can match an invoice, and the currency converter helps when an invoice is in another currency.

This guide explains how things work in general terms. It isn’t financial, tax or legal advice. Spotted something out of date? Email errors@moneyotter.com and we’ll check it against the source.