Published June 9, 2025
Why Don’t Retailers Include Sales Tax In Prices?
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Updated - Originally published February 5, 2025
In many countries, the price listed on an item is actually the full price (as in exactly what you will pay). In the United States, however, we usually have to do some mental math or be surprised by our total at the checkout because sales tax isn’t included in the price.
Why are prices in the United States listed without sales tax? Why is this the tradition, and what does it mean for customers and sellers? Is it merely how things have always been done? Or an attempt to trick customers?
I know I’ve wondered about all these questions. As a part of The Sales Tax People, we get these questions all the time. To help you get to the root of the issue, let me first walk through how sales tax works in the United States.
In the United States, sales tax is added to the sales of goods and services, typically as a percentage of the purchase price. There isn’t a federal sales tax in the U.S., but most states levy their own local sales tax to bring in revenue for the government at the state and local levels. State sales tax revenue typically funds government programs and services, including healthcare, infrastructure, and education.
Sales tax was first introduced during the Great Depression and by 1947 had become states' largest single source of tax revenue. That’s not the case anymore, even though sales tax rates have increased over time. Today, the total percentage of revenue coming from sales tax has decreased since that peak in the mid-20th century. In 2020, for example, state governments collected $341 billion (roughly 15%) of their entire revenue from sales tax. Some states, including Nevada and Washington, earned close to 25% of their total revenue from sales tax, while states like Vermont only earned around 5% of total revenue from sales tax.
The decline in percentage of total revenue is primarily because of a shrinking tax base (the number of items being taxed). All tangible personal property is subject to sales tax but only certain services are—and services represent a growing share of economic activity.
Businesses don’t earn revenue from sales tax, they are just responsible for collecting and remitting it to the government. For businesses operating in multiple states, this means determining each state’s tax rate and adding it to the purchase price.
In today’s shopping environment, which is dominated by online sales, sales tax is calculated based on the location of the purchaser, not the location of the seller. For example, a customer in Oregon who orders an item online won’t pay any sales tax (Oregon has no state sales tax), even if the company selling the item is based in a state with sales tax. The opposite is true: a customer in Texas purchasing from an Oregon-based company will pay Texas’ 6.25% sales tax on the purchase.
In addition to state sales tax, local governments can also charge an additional tax. In fact, thirty-eight states also charge local sales tax, typically at a county or city level, with revenue going directly to the local government where it is collected. Areas can have multiple local sales taxes, such as a county, city, or even a special tax used to fund things like business development or infrastructure.
There are two basic reasons retailers in the U.S. don’t include sales tax in their prices: tradition and simplicity.
The simplest explanation for why many retailers don’t include sales tax in listed prices is because it's how things have always been done. Sales tax started in the U.S. as a sort of experiment during the Great Depression. Only a handful of states initially enacted a tax, and some weren’t even sure it would be effective. For that reason, they didn’t change their pricing structure. That tradition continues today.
The second rationale for leaving sales tax off listed prices is sales tax can get really complicated. For starters, sales tax isn’t included for every item. In most states, for example, groceries don’t have sales tax added—but in a handful of states, the normal state sales tax rate does apply to groceries. And in a handful more, a unique sales tax rate applies just for groceries.
Another significant factor is that rate charged will vary by state and even within cities and counties in the same state. For in-person transactions, a customer might pay one rate in one state and a different rate just by crossing the border. There are more than 7,000 tax jurisdictions in the U.S., meaning potentially 7,000 different total prices. And since 2004, there have been more than 3,000 changes to American tax rates. All of this means a whole lot of rates and calculations for retailers to stay on top of.
The base price remains the same, but the total cost varies depending on the store's location. Including sales tax in the price can confuse customers and create more work for retailers. A retailer with multiple locations must calculate and print separate price tags for each store, which adds complexity, especially when customers return items to a different location.
Since sales tax rates vary across states and countries, retailers find it easier to print a single base price and use automated point-of-sale systems to apply the tax at checkout. Since businesses don't keep sales tax revenue, printing multiple price tags would be costly with no real benefit.
How do practices in the U.S. compare to other countries? In many countries, sales tax (or VAT) is included in the listed price, meaning the price on the barcode or tag reflects the total amount the consumer will pay. This practice is most common in Europe, where the EU mandates all retailers to include VAT.
While simplicity is one reason retailers opt not to include sales tax in list prices, many argue that leaving it off is just as frustrating. Many customers experience “sticker shock” when they see the final tax-included price. Shopping is not just a financial transaction, it's also a mental and emotional one. The psychology of shoppers affects what they’re willing to buy and how much they’re willing to spend.
Most U.S. shoppers expect that the price on the sign or tag isn’t the final amount they’ll pay. Over time, many develop a rough idea of how much sales tax to add mentally. However, customers aren't always accurate in calculating sales tax, leading to mistakes and challenges, particularly in cash-only transactions. Retailers may end up with a handful of coins instead of a round price.
Studies have found that when sales taxes increase, customers stock up on items in preparation. While the savings may be negligible, customers often feel better about buying items at a lower sales tax rate. The same applies to adding sales tax to the total price—customers may buy more in areas with lower tax rates, even for small savings.
Not including sales tax in the purchase price allows businesses to set the same price across all tax areas. For example, a $100 product will cost customers differently in California (7.25% tax) versus Maine (5.5% tax). However, the retailer still takes home $100 for each product, regardless of the tax rate.
If businesses include sales tax in the price, they face a dilemma. They either earn less per item in high-tax states or risk poor optics by varying prices based on tax rates. If a retailer prices its product at $100, including sales tax, its revenue will vary depending on the state. These differences may be small, but they can add up over time.
By not including sales tax in the total price, retailers gain flexibility. They can streamline pricing across their entire business, especially if it operates in multiple states.
Much like the tax rates themselves, the rules and regulations of sales tax change regularly. For example, in Washington state, it was illegal for businesses to include sales tax in the total price until a court case in 2012 changed the decision. Retailers and restaurants can include sales tax in the listed price, as long as they clearly indicate that tax is included. In other states, including California, retailers can post a sign that states “All Prices Include Sales Tax” but must follow certain regulations.
Several states have re-evaluated sales tax regulations, and others may follow, particularly with the growing focus on customer rights. While the U.S. maintains the tradition of adding sales tax at checkout, there's no guarantee it will last forever.
If you want to learn more about preparing your business with a smooth sales tax process year-round, set up a free, no-obligation call with one of our tax experts to get started with a customized sales tax system for your business needs.
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