Why isn’t tax included in the price and should you add it?

It can be tempting for ecommerce sellers to advertise one price to all customers, tax included. Sales tax is one more charge added at the checkout that could cause a customer to abandon her shopping cart. It may seem simpler to just include sales tax in the prices you charge online.

But in reality, advertising tax-included prices is anything but simple.

Why you may want to include sales tax

If you travel to England, you will never see sales tax added to your purchases -- the price on the tag is exactly what you will pay. The United Kingdom has one tax rate for the whole country, and sellers are required to include that Value Added Tax or VAT (which is 20 percent on most items) in their advertised prices. This makes it easier for customers to calculate what they will owe at the checkout: no unpleasant surprises.

In the US, the situation is the opposite: Retailers rarely advertise tax-included prices. Unpleasant surprises at the checkout are a matter of course. But that doesn’t mean that you can’t do it. Some states, like Michigan, even include a formula for backing sales taxes out of your total sales amount, if you want to include sales tax in your sales price instead of adding it on later.

In other states, you can simply do the math to figure out which part of your sales price is sales tax. The remainder is the retail price you will report to the state when you fill out your sales tax form.

The Hawaii exception

Hawaii doesn’t care whether you include sales taxes in your prices or not. Hawaii officially has a General Excise Tax, or GET, rather than a sales tax. You can add this tax to the prices you charge. You can even add a small amount of tax on top of the tax, because the GET you charge becomes part of your gross receipts, on which you will owe tax.

Because the tax is owed by businesses, not customers, you can’t back the tax out of your retail prices. You owe Hawaii GET on top of whatever you charge your customers, including added taxes.

Why you may not want to include sales tax

Tax-included prices can create headaches for online sellers. Whether you include it in the price or add it on at the checkout, you will be responsible for paying sales tax in the states where you have nexus. And there are several good reasons that you might not want to include sales tax in the list price of the goods you sell online.

For one thing, U.S. sales tax rates vary from state to state and county to county, and sometimes even within one city. If you charge everyone the same price but have to pay varying amounts of sales tax, you won’t be getting the same amount of money for your products. This can make it hard to calculate profit and loss and could hurt your bottom line, particularly if your margins are thin.

Then there's the math. If you sell a pair of shoes for $100 including sales tax and the tax rate is 6 percent, the sales tax is not $6.00. The sales tax due on $94 is $5.64. You just shorted yourself by $0.36. That doesn’t sound like much, but multiply that by thousands of sales and you are cutting into your profits.

To use the Michigan example, you would divide that $100 by 17.6667 to determine the correct 6 percent tax of $5.66. Your gross sales price in this example is $94.34.

Legal issues that can arise when you include sales tax

Some states take issue with “tax included” pricing. In Washington, it was illegal to advertise prices as including tax until a 2012 court case forced the state to change its policy. Still, Washington imposes conditions on the way retailers can advertise tax-included prices and even the tone of voice with which they speak to customers about the included sales tax (no joke).

Other states, including Texas and California, have their own regulations about advertising tax-included pricing. If you want to include sales tax in the price of goods you sell online, you'll need to research the policies of every state where you have nexus. It never pays to anger the tax collectors.

It may be confusing to charge your online customers the correct sales taxes in multiple jurisdictions, but it’s probably no more baffling than trying to manage the calculations after the fact. This is where tax compliance software comes in handy, so you don’t have to track the myriad sales tax rules on your own.

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