Tax & income
Sales tax vs. VAT: Definition, Formula and Example
Retail sales tax is generally collected on taxable retail sales; VAT is a consumption tax collected through a credit mechanism across taxable stages of supply.
Scope: Generic price arithmetic; VAT context is the EU system and retail sales-tax rules vary by jurisdiction.
Other names and related labels: Value added tax; Tax-inclusive and tax-exclusive prices.
How it works
For a consumer price, both may be represented by a tax-exclusive base plus a stated rate. That arithmetic does not mean the systems have identical registration, input-credit or invoicing rules. Rates, exemptions and the taxable base depend on jurisdiction and product.
Gross price = net price × (1 + tax rate); included tax = gross price × rate / (1 + rate)
Use decimal rates. Removing tax from an inclusive price requires division by 1 + rate, not subtraction of that rate times the gross price.
A price of $120 including a hypothetical 20% tax
Assume the entire item is taxable at that one rate.
- Net price: $120/1.20 = $100.
- Included tax: $120 − $100 = $20.
- Check: $100 × 20% = $20.
The tax-inclusive $120 consists of $100 net price and $20 tax.
Hypothetical rate; one taxable item; no exemption, special rounding rule or business input-credit calculation.
Try these example inputs20% of the gross price is not the included 20% tax
That subtraction would remove $24 and be wrong for this example. The calculators perform entered-rate arithmetic; they do not determine where you must register, which rate legally applies or whether VAT is reclaimable.
Explore with a calculator
- Sales Tax Calculator
Add or remove tax using the entered rate.
- VAT Calculator
Solve the VAT rate, net, gross or tax amount from two known values.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms