How sales tax and VAT are calculated
There are two directions, and they use different formulas:
- Adding tax to a net price: tax = net × rate ÷ 100, and gross = net + tax.
- Extracting tax from a gross price: net = gross ÷ (1 + rate ÷ 100), and tax = gross − net.
Results are rounded to the smallest unit of the currency (cents for dollars and euros, whole yen for yen). Rounding can differ by a cent from tools that round per line instead of per total, so use the same method as the invoice you send.
Worked examples
Adding tax. A product sells for $100 before tax in a city with a combined 8.25% sales tax rate. Tax is $100 × 8.25% = $8.25, so the customer pays $108.25.
Extracting VAT. A German supplier's receipt shows €119.00 including 19% VAT. The net price is €119 ÷ 1.19 = €100.00, and the VAT is €19.00.
Showing tax on an invoice
List prices before tax, then show the tax rate, the tax amount and the total on separate lines. In the EU and the UK, a VAT invoice must also show your VAT number and, for cross-border business sales, the customer's VAT number. The invoice generator applies the rate you pick here to every line item, and the glossary explains terms such as reverse charge.
Frequently asked questions
What is the difference between sales tax and VAT?
US sales tax is charged once, at the final sale to the customer, at a rate set by the state and local governments. VAT and GST are charged at every stage of the supply chain, and businesses deduct the tax they paid on purchases from the tax they collect.
Why can't I just take 20% off a VAT-inclusive price?
Because the tax was calculated on the net price, not on the gross price. To remove 20% VAT from 120, divide by 1.20 to get 100. Taking 20% off 120 gives 96, which understates the net price and overstates the tax.
What sales tax rate should I use in the US?
Add the state rate and any county, city and special district rates for the place where the sale is taxed. Many states tax based on the buyer's address for shipped goods. Check your state revenue department's rate lookup tool for the exact combined rate.
Are the VAT rates in the list up to date?
They come from a published snapshot of EU rates dated October 9, 2026. Rates change, and many goods and services use a reduced rate or are exempt, so confirm the rate for your product with the country's tax authority before you invoice.