If you have been thinking about traveling to the US, then you may be surprised to find out that the prices for groceries, food, and any other item, do not include sales tax.
So, why doesn’t the U.S. include tax in prices? There are multiple reasons for this. It has to do with the varying tax laws, smart advertising tricks, and more.
Keep reading to learn all the reasons behind why prices are published without tax in the US.
What Is A Sales Tax Added To Products In The US?
A sales tax in the United States is a tax added to the final advertised or published retail price of a product while purchasing or leasing it. The sales tax is usually a percent of the original price of the product.
Anywhere else in the world, it is fairly common to expect that the MRP of any item is inclusive of all the applicable taxes.
However, this is certainly not the case in the United States of America.
How Does The Sales Tax Work In The U.S.?
Before we take a look at the various reasons for not including sales tax in the price, let us first understand what exactly is a sales tax, and how sales taxes work in the US?
When you purchase something or lease something in the United States, a sales tax is added to the marked price of that product.
In most countries, this sales tax is in the form of VAT, which is monitored by the national government.
VAT stands for Value Added Tax.
The one major difference between VAT and a sales tax is that while sales tax is completely paid by the consumer, the VAT is paid by the different parties involved in the sale of that product.
The value-added tax is paid during the production, packaging, distribution, and overall sale of a product.
On the other hand, a sales tax is only paid at a retail level, by the direct consumer of that product.
In the United States, as mentioned by the National Conference of State Legislatures (NCSL), the federal government does not levy a general, overall sales tax.
As compared to other countries that include tax in their prices, they have a national value-added tax (VAT).
Sales taxes in the United States are charged by the state and/or the local government of a particular area.
Other than this, the sales tax also depends on a set of various factors.
Sales Tax can only be charged on a set of taxable or tax-eligible items or it depends on specific instances, such as the ones listed below:
- Tangible Property
- Transfer of Goods
- Food for consumption on-premises
The type of tax levied varies drastically based on a wide range of factors.
This is one of the many challenges because while buying goods in the US, it is common to first come across the price without the tax, which is added later, during the sale of the goods.
Read More: What Is A Service Charge At A Restaurant?
Why Doesn’t The U.S. Include Tax In The Price Of The Goods?
The U.S. does not include tax in the price of the goods because of reasons such as varying tax laws, consumer benefits, tax exemptions, etc. Since sales tax is not paid to the seller, but to the government, sales tax is not added to the price in America.
The price of a product is defined as the sum of money paid to the seller by the consumer wanting to buy that product.
The U.S. does not have a nationwide sales tax.
Now that we have a brief understanding of how sales tax works in the United States, let us look at the reasons why does America not add the tax to printed prices.
Following are the major reasons why printed and advertised prices of tangible goods, food items, and more do not include sales taxes in the US.
Varying Tax Laws:
The primary reason that sales tax is not included in the price of goods is that the U.S. does not have one common federal law regulating sales tax. Instead, sales taxes fall under the jurisdiction of the states.
As a result, every state has its own sales tax and laws. Furthermore, the sales tax can also vary within a particular state based on the local government, type of products, where or who you are buying the product from, and various other factors.
Stick around till the end of this article to see the rate of sales tax based in different states, as well as to learn about states that do not have any sales tax. Due to this difference in sales tax, manufacturers often print the price without the tax.
Following is a tabular summary of different states and the base sales tax applied in the individual states:
|Base Sales Tax Applied
If you like to dine out often, you would know that the food service industry in the U.S. too, has varying tax/charge laws. For example, some restaurants in the U.S. charge a service fee while others don’t. What is a service charge, really? What is the usual service charge at a restaurant? Read this article to find out!
Another major reason behind not mentioning the net price, that is the price with the sales tax included upfront is to promote transparency, as one consumer on the Y-combinator discussion board highlights.
When the tax is baked into the price of the goods, you as a consumer are unaware of where your tax dollars are going and how this tax money is being used. But in the U.S. where sales tax is not mentioned on the price, things are different.
In the US, the sales tax is either added by the state government of the state where the purchase is being made, or by the local government of that area. Because of this, the taxpayer knows precisely where his or her tax money is going.
This makes the process of tax collection more transparent, compared to other countries that have value-added tax or VAT-based pricing.
Another benefit of this transparency is that the consumer knows exactly what they are paying for and how much that particular product costs. This empowers the consumers by making it easier for them to understand exactly who their money is going to.
For example, if you buy a can of soft drink in the U.S. that has a $2 (two dollars) price tag on it.. Then you pay an additional $0.20 (twenty cents) on it as sales tax, then you as a consumer know exactly what portion of your money is going to which organization.
This is not the case in countries where sales tax is included in the price.
As we have seen, sales taxes are only charged on tangible goods in most states. This means that services are exempt from sales taxes which makes things more affordable for the consumers.
The separation of sales tax from the price of a product also makes it easier for the general public to track how much money they have paid in taxes. This can come in handy when filing ITR or Income-tax returns and for claiming reimbursements from employers.
Another aspect of this that often gets overlooked is the resale of goods.
In countries that have value-added tax inclusive pricing, the tax is paid by everyone over and over again, every time the product is sold right from the manufacturer, to the customer, and even the person who is buying the products second-hand, that is when it’s being resold.
This is the opposite of what happens in the U.S. where sales tax is added only during the first retail of the product.
Let us consider an example of a product that costs $30K in both the U.S. and the UK.
If both the countries levy a 20% tax on this product then, a customer in the U.S. will pay $30k for the product and an additional $6000 as sales tax.
On the other side of the pond, a person in the UK, buying the same product will pay a total of $36k for it overall.
But when the same product is being resold at 50% of the original price, in the U.S. it will be resold for $15,000 whereas in the UK it will be resold for $18,000.
Not implementing tax-included pricing is also great and convenient when dealing with tax exemptions. While B2B trades aren’t exempt from taxes, there are many exceptions when it comes to B2C retail.
It is not uncommon for the states and cities in the U.S. to have tax exemption policies. The goal of these tax exemption policies is to help certain members of society. Many organizations such as charities, homeless shelters, community kitchens,s and more are also exempt from paying taxes.
Tax exemption is not just limited to particular individuals or organizations. A certain category of products is considered tax-exempted in certain states.
Separating the price of the goods and the sales tax makes the whole process of implementing these tax exemptions more convenient and smooth.
Ease Of Production:
When a manufacturer is making a certain product, he or she is not aware of where that individual product is going to retail. This is why it is more convenient for them to have one common price printed on all their products.
If the manufacturer of a product were to make the price labels specific to the state, it would add to the cost of production, as well as increase the time of production.
This, in turn, can result in two things, either the manufacturer will raise the base price of their goods, which may lead to fewer people buying their products, impacting the profit margins.
Or the manufacturer of the product will have to bear this increased cost of production on their own, which, again, would hurt their profit margins.
In addition to this, it is common for the laws surrounding sales tax to keep fluctuating, which would make the process of adding sales tax to prices even more unsustainable in the long run.
Another common problem that arises with this is to do with the last point of tax exemption. As mentioned earlier, many states do not levy taxes on a certain category of products.
For example, let us look at prescription medication. In the states listed below, prescription drug prices are exempt from all taxes.
- New Hampshire
- New York
- North Carolina
- Rhode Island
- South Carolina
- West Virginia
Whereas in the remaining states of Hawaii, Kansas, Illinois, Louisiana, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, North Dakota, Oklahoma, South Dakota, and Tennessee, there are general or sales taxes levied on prescription drugs.
As a result of this, it is difficult for the drug manufacturer to add the prices of the drugs based on what states they are going to. This can potentially raise the cost of the drugs a little more which can make them inaccessible to some people.
This is one of the reasons why the printed prices do not include sales tax.
What Are The Effects Of Not Adding Sales Tax To The Retail Prices Of Goods?
Not including sales tax in the price itself has both positive and negative effects. While it can make consumers more aware of how the taxes they pay are helping them, it can also create a lot of confusion.
The transparency of knowing exactly how much you tax you are paying on everything from your weekly groceries to your new car makes the consumer more knowledgeable and involved.
You, as a consumer, know what you are paying for, how much of your money is going to the manufacturer of the product, and how much of it is going to the state government or your local county.
If you know where your tax money is going, you can hold the government more accountable, you can lobby for better tax policies, and even reduce taxes.
This can also help you estimate the cost of living more accurately, which can be helpful if you are trying to move as you can move to places with lower or no sales tax.
On the flip side, one of the major drawbacks of not having a uniform price often leads to false, or rather misleading advertisements. Stores and retail chains can, and often do advertise the price of the products without taxes.
This can be very misleading as, after the addition of sales taxes, the product can become anywhere from 10% to 25% more expensive, which can be all the difference between if a person can afford that product or not. This also makes doing your monthly or weekly shopping a whole ordeal.
Can Tourists In America Get A Refund On The Sales Tax?
No, unfortunately, if you are a tourist and you purchase something for a retail store in the US, you won’t be refunded for it.
As pointed out by The Guardian, travelers and tourists leaving the U.S. do not get a refund when they are leaving the United States. The reason behind this is the same as the reason behind why prices are published without tax in the US.
The sales taxes are managed and governed by the individual state and local county governments.
Whereas it is the responsibility of the federal government to carry out tax reimbursements for departing tourists.
Since the federal government is not invaded in the collection of taxes, they cannot refund you either.
This is further clarified by the U.S. Customs and Border Patrol department on their website. If in case you are making a major purchase during your stay in the US, and you wish to get a refund for the sales tax on that purchase, then you will need to contact the taxation office of the state where you are purchasing the said item.
Which American States Do Not Levy A Sales Taxes?
As of June 2022, there are four U.S. states that do not charge any base sales tax on the sale of groceries, prepared food, prescription drugs, nonprescription drugs, and feminine hygiene products. These are:
- New Hampshire*
*New Hemshpire has a 9% tax on prepared food, that is to be consumed on the premise, but a 0% base tax.
In these four states, the published price of the product is the same as the price with the sales tax included, since the sales tax is 0%.
Sales taxes are not included in the prices of goods, in the U.S. as sales tax laws are not federal, and not uniform. Keeping the sales tax and the actual price of the product separate promotes transparency and increases consumer awareness.
While many people still think shaving a nationwide uniform VAT or value-added tax would be a better idea, a majority of the people are happy with the current system. In fact, over recent years, other countries such as Canada and more have also adopted a similar system of not including sales tax in the price of goods.
Dealing with an added sales tax is no trouble for Americans as they are used to paying whatever the sales tax is in their state. But if you are a tourist who is looking to travel to the U.S. any time soon, then make sure to keep in mind that the actual net price of any product is going to be higher than the price printed on the product.