National Retail Sales Tax: What is the difference between a “tax-exclusive” and “tax-inclusive” sales tax rate?
A tax-exclusive tax rate refers to the amount of tax paid as a proportion of the pretax value of whatever is taxed; sales tax rates are typically expressed in tax-exclusive terms. A tax-inclusive rate, conversely, refers to the amount of tax paid as a proportion of the after-tax value; income tax rates are often expressed in tax-inclusive terms. Thus the difference between the two definitions is whether or not the tax paid is included in the denominator when calculating the tax rate.
- Although there is no single correct way to report a sales tax rate, it is crucial to understand which approach is being used. The tax-inclusive rate will always be lower than the tax-exclusive rate, and the difference grows as the rates rise. At a rate of 1 percent the difference is negligible, but a 50 percent tax-exclusive rate corresponds to a 33 percent tax-inclusive rate—a 17-percentage-point difference.
- As an example, suppose a good costs $100 before tax and has a $30 sales tax. The tax-exclusive tax rate would be 30 percent, since the tax is 30 percent of the pre-tax selling price. The tax-inclusive rate would be about 23 percent, which is obtained by dividing the $30 tax by the total cost to the consumer ($100 + $30).
- Sales tax rates are typically quoted in tax-exclusive terms, but income tax rates are typically quoted as tax-inclusive rates. For example, a household that earns $130 and pays $30 in income taxes would normally think of itself as facing roughly a 23 percent (30/130) income tax rate.