Sales tax vs. VAT: on top, or already included

Tax on an invoice comes in one of two shapes. Either it sits on top of the price — you quote 100.00 and the customer pays 100.00 plus whatever the rate adds — or it is already inside the price you advertised, so the 120.00 on the label contains the tax rather than attracting it. Which shape applies depends on where you are and what you sell. The arithmetic differs between them, and the second case is where hand-made invoices most often go wrong.

Added on top: the sales tax model

In the United States, sales tax is generally computed from the price and added at the point of sale, and prices are commonly advertised without it. The listed price is usually what the seller keeps; the tax is a separate line that the seller collects and remits. On an invoice this is straightforward: 100.00 of goods at an example rate of 7% produces 7.00 of tax and a total of 107.00. The subtotal, the tax, and the total are three distinct numbers and none of them has to be worked backward out of another.

Already included: the VAT and GST model

Value-added tax and goods-and-services tax systems generally require consumer-facing prices to be shown tax-inclusive, so the advertised figure is the whole amount the buyer pays. That does not mean the tax disappears from the paperwork. A business invoice typically still has to state the net amount, the tax, and the gross separately, because the buyer may be entitled to reclaim the tax and needs to see the figure. So the seller starts from a gross price and has to find the tax that is already sitting inside it.

The arithmetic: divide, do not subtract

To find the tax inside a tax-inclusive price, divide by 1 plus the rate. Take 120.00 at a rate of 20%:

• Correct: 120.00 ÷ 1.20 = 100.00 net. The tax is 120.00 − 100.00 = 20.00, and the total stays 120.00.
• Wrong: 20% of 120.00 = 24.00, leaving a net of 96.00. The tax is overstated by 4.00 — a fifth of the correct figure — and the net is understated by the same amount.

The reason is that a percentage is always a percentage of something, and the something here is the net price, not the gross one. The 20.00 of tax is 20% of 100.00, which is what the rate means. Taking 20% of 120.00 charges tax on the tax. The overstatement works out to the rate itself, expressed as a share of the correct tax: at 5% you overstate the tax by a twentieth, at 20% by a fifth, at 25% by a quarter.

As a general formula, the tax inside a gross price is gross × rate ÷ (1 + rate). At 20% that reduces to dividing the gross by six; at 10%, dividing by eleven. Those shortcuts are just the same division written differently, and they let you check a printed invoice in your head.

Which mode to pick in the generator

The invoice generator offers three tax modes, and the choice is only about what the price you typed already contains:

• No tax — no tax line is printed at all.
• Added on top — the unit prices you entered are net. Tax is computed from the taxable base and added, so the tax line increases the total.
• Already included — the unit prices you entered are gross. Tax is extracted by division and shown on its own line, which does not change the total.

A separate tax label field controls what the line is called, so it can read VAT, GST, sales tax, or whatever term your customers expect. The label is cosmetic; the mode is the part that changes the numbers. If you enter tax-inclusive prices but leave the mode on “added on top”, the tool will faithfully add tax a second time, and the total will be wrong in a way that is easy to miss because every individual figure looks plausible.

One ordering detail matters in both modes: a discount comes off before the tax is worked out, because tax follows what was actually charged. The methodology page sets out the full order of operations, the integer-cent arithmetic, and the rounding rule, with the inclusive and exclusive examples computed at build time by the same engine the tool uses.

What the tool knows about your tax, which is nothing

Rates, registration thresholds, which goods are exempt or zero-rated, whether you must charge at all, and how cross-border sales are treated vary enormously between countries and, in the United States, between states and localities. A rate that is right for one customer can be wrong for the next one down the road. None of that is modeled here. The tool applies the rate you type, in the mode you select, and prints the result — it does not look up your jurisdiction, validate a tax number, or decide whether a sale is taxable.

That division of labor is deliberate, but it does put the substantive question on you. If you are unsure whether to charge, at what rate, or whether your prices should be shown inclusive of tax, that is a question for your tax authority's own guidance or an accountant who knows your situation. This page explains arithmetic, not obligations, and nothing on this site is tax or legal advice.