Resources Blog Retail

Sales Tax by State: Can retailers include sales tax in the price of the item?

by Jennifer Dunn March 30, 2021

Here in the US, we’ve grown accustomed to paying $23.77 or $5.11 on a purchase. That’s because, in general, when you make a purchase in the US you pay for the price of the item plus the sales tax rate.

However, some vendors have good reason to include the sales tax in the posted price of the item. Perhaps you’ve set up a booth at a craft show and want to keep your prices at a nice and round $20 or $100 so your customers can easily pay cash. Or you own a vending machine. I’ve never seen a vending machine that requires sales tax! (Though most items sold in a vending machine are subject to tax the same as if they were being sold in a store, but that’s the subject of a blog post for another day.)

From time to time here at TaxJar, customers ask us if they are allowed to include sales tax in the posted price of an item.

Let’s break it down.

The Pros of Tax Included Pricing

Tax included pricing is generally for your customers’ benefit. If you include tax in the price of an item, what they see is what they pay. This can be especially useful in a cash situation such as a trade show or art fair. Perhaps your child’s sports team is selling candy bars as a fundraiser. It’s a whole lot easier to ask a captive audience of friends and family to pony up a five dollar bill than it is to ask them to pony up $5.11.

But as customer-friendly as tax included pricing is, it has its downsides…

The Cons of Tax Included Pricing

First and most importantly, some states do not allow retailers to include sales tax in the price of the item. Keep reading for a list of what each state allows when it comes to tax included pricing.

But if you do operate in a state that allows tax included pricing, you have other issues. Even if you, the retailer, include the sales tax in the price of the item, when it comes time to file your sales tax return you are still required to break out exactly how much sales tax you collected on each transaction.

If you only sell one item for one price, then chances are you know how much in sales tax you’re collecting. But who in this day and age doesn’t sell a varied product mix?

And tax included pricing gets even more tricky for retailers, like eCommerce businesses, who sell to customers all over the country and collect varying rates.

Let’s look at an example.

Say you list a table lamp on your website at $100, tax included. Well, if you sell that table lamp to a buyer in Connecticut (where the tax rate is a flat 6.35%) then you’re required to remit $6.35 in sales tax to the state of Connecticut on that transaction.

But if you sell the same table lamp to a buyer in Aberdeen, Washington, where the sales tax rate is 9.08%, then you’d be required to remit $9.08 in sales tax to the state of Washington.

As you can see, you are cutting into your profit margin by including tax in your pricing.

Further, US customers are accustomed to paying their local sales tax rates. We’re so accustomed to paying odd amounts in sales tax that paying a flat rate might surprise us or leave us a little confused.

Need help with tax included sales tax filing?

Have you already included sales tax in the price of your items? That can make filing sales tax returns challenging, but TaxJar has your back. With our Expected Sales Tax Due report, we show you how much sales tax you should have collected on each transaction. We also show you how to fill out your state tax returns correctly, or even AutoFile your tax returns for you using the correct rates you would have collected had you not included tax in the pricing.

Ready to automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.

Which States Allow Tax Included Pricing

We contacted every state to determine whether or not they allow retailers to include sales tax on the price of the item. Here’s what they said.

Note: As always, we recommend checking with the state or a vetted sales tax expert before making a change to how you collect sales tax. In this case, we especially recommend getting the green light from the states listed here that do not have explicit laws or sales tax regulations regarding tax included pricing. We’ve done our best to ensure the accuracy of the information below at the time of posting, but sales tax rules regulations are always changing.

 

 

---