Sales Tax vs VAT: Key Differences Explained

The Same Math, Different Systems

Whether you paid US sales tax, UK VAT, Canadian GST, or Australian GST — the reverse tax formula is identical: pre-tax = total / (1 + rate). The mathematical structure is the same. The economic and legal structures are very different.

US Sales Tax

How it works: Added on top of the listed price at the point of sale. The price on the shelf does not include tax. You see the tax only at checkout.

Who collects it: The retailer collects from the consumer and remits to the state government. There is no tax on intermediate sales between businesses (in most cases) — only the final consumer pays.

Rate: Set by states, counties, and cities separately. The combined effective rate varies from 0% (Oregon, Montana) to 9-10%+ (Louisiana, Tennessee). There is no federal sales tax in the US.

Reverse calculation: The total on your receipt = listed price + sales tax. Reverse: pre-tax = total / (1 + combined rate).

VAT (Value Added Tax)

How it works: Included in the displayed price. The price on the shelf already includes VAT. Businesses at each stage of production pay VAT on their value-added and reclaim VAT they paid on inputs, so only the final consumer bears the full tax.

Who collects it: Every business in the supply chain, with reclaim mechanisms. The consumer pays the embedded VAT but doesn’t file for it separately.

Rate: Set at the national level. UK: 20% standard, 5% reduced (home energy, children’s car seats), 0% exempt (most food, books). EU rates vary: Germany 19%, France 20%, Sweden 25%.

Reverse calculation: The total on a UK receipt = price including 20% VAT. Reverse: pre-tax = total / 1.20. This is the same formula — the only difference is you’re removing an already-included tax rather than one added at checkout.

GST (Goods and Services Tax)

Canada: 5% federal GST, with some provinces adding Provincial Sales Tax (PST) separately, and others combining into Harmonized Sales Tax (HST). Ontario HST = 13%; Nova Scotia HST = 15%; Quebec GST = 5% + QST = 9.975% = effective 14.975%.

Australia: 10% flat rate on most goods and services. Some items are GST-free (basic food, medical services, education). Displayed prices typically include GST.

Reverse calculation: Same formula. Australian $110 price: pre-tax = $110 / 1.10 = $100.

Why the Formula Is the Same

In all cases, the relationship is: Total = Pre-tax × (1 + rate). Whether the tax was added at checkout (US sales tax) or embedded in the price (VAT/GST), the arithmetic is identical. The only practical difference is what number you start with:

• US Sales Tax: total on receipt after checkout
• VAT/GST: the price displayed in the store (already includes tax)

Both cases: pre-tax = total / (1 + rate).

Comparison Table