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4 Min. Read

What is the Difference Between Tax Inclusive vs Tax Exclusive?

Tax Inclusive vs Tax Exclusive: What’s the Difference?

There are two types of methods to apply tax on items. As a consumer, it can be confusing and time consuming to understand if the cost of an item will increase when you go to checkout. For business owners, it’s essential to know the difference between Tax Inclusive and Tax Exclusive costs so that you can instil a system that works best for your business.

Recognizing the difference between Tax Inclusive and Tax Exclusive rates will help you gain an understanding of common implemented tax strategies and help you navigate your expenses.

This Article Will Cover:

  • Understanding Tax Methods
  • The Benefits of Tax Inclusive
  • The Benefits of Tax Exclusive
  • Key Differences Between Tax Inclusive vs Tax Exclusive

Here’s What We’ll Cover:

Understanding Tax Methods

What is Tax Inclusive?

What is Tax Exclusive?

Bottom line: Tax Inclusive vs Tax Exclusive

Understanding Tax Methods

There are 3 general forms of tax: taxes on what you earn, taxes on the assets that you own, and taxes on the things you buy.

The tax implemented on a unit price is called sales tax. Sales tax is typically excluded from an initial cost, and you will generally see the tax amounts added to the total amount at the point of sale, this is an example of Tax Exclusive pricing.

Retail sales taxes are a significant source of state and local revenue, which is why the U.S. relies so heavily on collecting it. Most states collect a percentage of sales tax and those sales tax rates have a significant impact on where consumers bring their business.

When considering a good or a service, depending on the selling price, there can be a costly tax rate added to the purchase amount. As a consumer, it’s helpful to know what you will be paying after the tax amount is added. As a business owner, it’s important to decide at what point you will implement the tax amounts.

What is Tax Inclusive?

Tax Inclusive refers to the tax amount that is included in the price of purchase. An example of this would be if a merchant wanted to charge $100.00 for a service and there is a 10% tax, they would offer that service for $110.00, tax included.

In some cases, tax inclusive prices are preferred when it comes to quick transactions, especially when cash methods are suggested. It’s much simpler for a merchant to prepare tax inclusive prices of their products and give a flat rate unit amount, than to wait until the final transaction to know the grand total.

Stating that the sales tax is included in the selling price will help clients calculate the total amount, and will assist in calculating a final invoice. Keep in mind that as the value of the product or service increases, the tax rate will also increase.

Key Elements of Tax Inclusion:

  • Clients pay a flat rate for a product or service
  • Calculations of tax rates are done prior to transaction
  • Unit price will be lower before tax percentage is applied
  • Income tax rates are generally quoted as tax inclusive

What is Tax Exclusive?

Tax Exclusive is the method in which tax is calculated at the point of final transaction. A merchant may charge $100.00 for a service plus tax. If the tax amount is 10%, you will have to factor in an additional $10 at the point of purchase.

Tax Exclusive rates may be favored by business owners that do not want to take tax into consideration when pricing their products or services. This method also provides a more detailed accounting of expenses when creating an invoice.

Keep in mind that consumers may want to have a clear indication that tax is not included, so that they can expect the total amount to be higher at the point of purchase.

Key Elements of Tax Exclusion:

  • Business owners do not need to factor in tax to their rates
  • Tax is added at the point of the final translation
  • Tax is isolated on receipt of sale
  • Sales tax is typically excluded from initial rate

Bottom line: Tax Inclusive vs Tax Exclusive

Tax Inclusive rates will always include tax in the total that you see in the unit price, whereas Tax Exclusive rates will be excluding the tax that will be added at the point of purchase.

Tax exclusive rates will always be lower than the tax inclusive rate, and the difference will increase as the amounts rise. Keep in mind that as the value of a product or service increases, the tax rate will also increase.

As a business owner, it's helpful to understand the difference between exclusive and tax inclusive rates. Knowing how to identify a flat rate and a rate that is subject to an additional tax amount will help you predict the total cost you will pay when considering goods and services.