How to include sales tax in your prices

If you charge sales tax, VAT or GST, your margin is worked out on the price before tax. Set the price you need to cover your cost and margin first, then add the tax: multiply by (1 + tax rate). To go the other way, from a tax-inclusive price to the pre-tax price, divide by (1 + tax rate). Subtracting the rate looks the same but gives the wrong answer, and putting your pre-tax price on the sign when prices are meant to include tax quietly hands part of your margin to the tax office.

Whether and how much: check locally

Sales taxes are different everywhere. Whether you must register and charge tax, the rate, and whether food is taxed at a different rate from other goods all depend on where you sell and sometimes on the product. Check your local tax rules or ask an accountant. This guide does not give rates; it shows how to handle whatever rate applies to you.

What is the same everywhere is this: the tax you collect is not yours. If you count it as part of your sales, your margin looks bigger than it is. That makes it one of the hidden costs of a food business that is easiest to misread, because it never feels like a cost. It comes in with the sale and goes out later.

Tax-inclusive and tax-exclusive prices

There are two ways prices are shown:

• Tax-inclusive: the price on the sign is what the customer pays, tax included. You have to take the tax out to see what is yours.
• Tax-exclusive: the sign shows the price before tax, and tax is added at the till or on the invoice.

Which one you use for consumers may be set by local rules. For wholesale, quotes are often tax-exclusive, but say so on the quote.

The three formulas

Write the tax rate as a decimal (10% is 0.10).

• Price with tax = price before tax × (1 + rate)
• Price before tax = price with tax ÷ (1 + rate)
• Tax inside a price = price with tax − price with tax ÷ (1 + rate)

Here is how it looks with 10%, a round number for the example, not the rate in any particular place:

The tax inside a price is not 10% of that price. It is 10% of the price before tax. In $11.00 there is $1.00 of tax, not $1.10.

The two most common mistakes

Subtracting the rate to remove tax. Your price is $7.50 and you take off 10%: 7.50 × 0.90 = $6.75. The real pre-tax price is 7.50 ÷ 1.10 = $6.82. The $0.07 gap looks small, but it is on every sale and it gets bigger as rates and prices rise.

Putting the pre-tax price on the sign. You work out the margin properly, get $6.50, and that is what goes on the sign. If your prices are meant to include tax, the customer pays $6.50 and the tax comes out of that. The worked example shows how much it costs you.

Worked example: a bottle of hot sauce

You sell 150 ml bottles of hot sauce, and your prices include tax. The loaded cost of one bottle is $3.90: chillies, vinegar, garlic, the bottle, the label, your time and the stove. For how to cost the bottle and label, see how to cost packaging and labels. You want a 40% margin. Use 10% as the example tax rate; swap in your own.

Step 1, the pre-tax price:

• 3.90 ÷ (1 − 0.40) = $6.50

That is the formula from setting a price that hits your target margin.

Step 2, add the tax:

• 6.50 × 1.10 = $7.15

Step 3, round up to a comfortable price: $7.50. Check the margin it leaves:

• Price before tax: 7.50 ÷ 1.10 = $6.82
• Tax: 7.50 − 6.82 = $0.68
• Profit: 6.82 − 3.90 = $2.92
• Margin: 2.92 ÷ 6.82 = 42.8%

What happens if you put $6.50 on the sign:

• Price before tax: 6.50 ÷ 1.10 = $5.91
• Tax: 6.50 − 5.91 = $0.59
• Profit: 5.91 − 3.90 = $2.01
• Margin: 2.01 ÷ 5.91 = 34.0%

You meant to make $2.60 a bottle (6.50 − 3.90) and you make $2.01. That is $0.59 less per bottle, exactly the tax you did not add. At 150 bottles a month: 150 × 0.59 = $88.50 a month.

Are your costs before or after tax?

When you buy supplies, the price you pay may include tax too. Whether you can reclaim that tax or it is simply a cost depends on your registration and local rules, so ask an accountant whether to cost ingredients, packaging and labels with or without tax. The safe rule: use the same basis throughout. If you cannot reclaim the tax on your purchases, it is part of your cost and belongs in the loaded cost.

Fees are charged on the tax too

Card readers and apps usually take their percentage from what the customer pays, tax included. If you take card payments, the guide on payment fees in your price shows how to adjust for it.

Do it with the calculator

In the food cost calculator, enter your recipe and the margin you want; it gives you the price for the sign without doing the tax arithmetic by hand.