Why Is Tax Not Included In Prices In The US?

Happy Wayfarer is reader-supported. When you buy through links on our site, we may earn an affiliate commission.

Getting the latest iPhone from the US may seem as cheap as chips but, unpleasant surprises at check out are a snag. I am talking about the non-inclusivity of indirect taxes in retail prices in the US. To approach a store counter to buy something and not know exactly how much you will be spending is always annoying.

In the United States, general sales taxes are excluded from the price tag. It explains why you end up paying more than a dollar for an item from the $1 menu at Burger King. In this article, I will be shedding light upon the whys and wherefores of this particular tax system in the US.

Are Prices In The US Without Tax?

Yes, listed prices in the US do not include taxes. When you purchase something in the US, you pay the listed price of the item plus the sales tax rate. Gross Price is the total price you pay for a product (after adding the sales tax), and the before-tax price is your Net Price.

Why Is The Tax Not Included In The Listed Prices In The US?

The fact that posted prices of products do not include indirect taxes in the US may be confusing for many people, especially tourists and non-natives. But several reasons justify it, and I will be enumerating them below.

The Complexity of Sales Tax Jurisdiction

The US follows a sales tax system, unlike a cohesive VAT in other advanced economies. Therefore, a product can have different levels of taxation depending on where its sold. There are numerous sales tax jurisdictions in the United States- the respective states (even counties and districts) have different sales tax rates and, not all items are taxed at the same rate. Furthermore, the rates are subject to change at relevant periods.

It boils down to the fact that there are more than 300 different tax rates in the US depending on the item sold and the state. Sometimes, the price you pay for a product in one store can be different from the total price of the same item marked with the same price at the store across the street (simply because the county changed, so did the combined tax rate!).

Besides, some places have occasional ‘tax holidays’ for certain kinds of products. Some localities waive taxes on sales of school supplies just before school starts in the fall.

All these reasons add to the complexities of tax calculations and justify why businesses save themselves from the hassle of adding sales tax to the price of each item.

Businesses Do Not Add Sales Tax To The Price because-:

The United States is laissez-faire capitalism, and the business owners like to separate their price from taxes, the domain of the government. The item appears less expensive when the pre-tax price is displayed, contributing to the propensity to buy. They want their customers to know the exact cost they are paying for the item. It also rules out the possibility of disguising the burden of the taxes imposed by the government(s) and make the people cognizant about the amount of sales tax they are paying.

Even if they want to include the taxes in the listed prices, there is little incentive to do so because-:

In some states, the Law explicitly requires that price tags do not include sales tax. In Washington, it was illegal to advertise prices inclusive of sales tax until 2012. Still, Washington imposes certain conditions on the ways retailers can advertise such prices.
Behavioral Economics is more optimized in the US than in any other advanced economy. If the producer decides to include the sales tax in the listed price, it will put his product at a competitive disadvantage considering that his competitors did not do so. Sellers believe that consumers are emotionally affected by the listed prices, even when the consumer knows logically what the ultimate cost will be.
It is cumbersome to chart out a marketing campaign for an item having a base price of $2 and a different tax price in 50 states.

Why is Sales Tax Not Included On Price Tags In US Stores?

If the store operator or retailer calculated and included the particular sales taxes assessed at that time, they’d have to go through their entire inventory and remark the prices to reflect that change. Adding this extra laborious step would likely increase the base price to pay the employees. It would be a hassle considering the frequent changes in tax rates.

How Is The Sales Tax Assessed When An Item Is Purchased Online?

When you buy products online, sales tax is not included in the price as it is different in different parts of the country. It is assessed based on whether the seller is based in an origin-based state or a destination-based state.

Origin Based States: If the seller is based in an origin-based state, the sales tax is collected based on the location of the seller. Origin-based states are Arizona, California, Illinois, Mississippi, Missouri, Ohio, Pennsylvania, Texas, Tennessee, Utah, and Virginia.

Destination Based States: Other states than the ones listed above follow the destination-based sales tax system. If the seller is based in a destination-based state, the seller charges the sales-tax rates prevailing in the states where the customer is based.

Sales Tax-Free States in the USA

Sales tax is inevitable, but five states in the US give a break to the customers making purchases as they have 0% state sales tax. Alaska, Delaware, Montana, New Hampshire, and Oregon currently do not charge any sales tax. Although these states do not charge sales tax, the counties and cities within these states can charge their own taxes.

FAQs

Here I have tried to answer some related frequently asked questions.

Q1. What is the difference between tax-exclusive and tax-inclusive?

Ans. Tax Inclusive prices include tax in the listed price, whereas Tax Exclusive rates will be excluding the tax that will be added at the point of purchase.

Q2. What is the difference between VAT and Sales Tax?

Ans. In a VAT, a tax is levied at every stage of value addition. The sellers at each step of the supply chain collect VAT.

On the contrary, sales tax is a consumption-based tax levied at the point of sale. A sales tax is collected by the retailer.

Q3. Is the non-inclusion of sales tax in the listed prices a hassle?

Ans. The non-inclusion of sales tax in the listed prices and the self calculation part might be a hassle for some people especially non-natives and tourists, but it is quite natural to others.