Sales taxes and shelf prices in the United States

One of the many complaints the rest of the world has with the United States, and it’s one on which I share some sentiment, is with a particular part of our tax policy: that we don’t include sales taxes in the shelf price. And there are a couple reasons why, starting with…

More than one tax

One thing much of the rest of the world forgets or never understands is the United States is a federated constitutional republic of 50 sovereign States. Note that word: sovereign. Each State has sovereignty separate from the United States. Each State has its own laws separate of everyone else. Meaning they all have their own taxes.

But within each State, we also aren’t paying just one sales tax.

Every State empowers their counties and municipalities to enact their own taxes to raise revenue for their own expenses. Property taxes are a classic example. As is sales taxes. Five States do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.

But in every city in every other State in the United States, you’re subject to the statewide sales tax and the city sales tax where the transaction takes place. You may also be subject to a third tax, that being the county level. And possibly additional “local option” taxes or other special sales taxes.

Okay, not really a valid excuse. Just include all of that in the shelf price, right? Well that’s not so easy because of math. More specifically…

Fractional pennies and rounding

This is the main crux of the matter. Let’s lead with an example.

On a recent grocery store run, I bought just 1 item for $12 – it was a take & bake lasagna. The e-receipt shows three taxes applied to it: 2% to Kansas, 1.48% to Johnson County, and 1.38% to Lenexa. On the one item, that came to about 58 cents in sales taxes.

And calculating those three taxes, the 2% one is straightforward, just 24 cents. But the 1.48% and 1.38% include fractions of a penny – 17.76 cents and 16.56 cents, respectively. So the total is 58.32 cents, which gets rounded off at the register. And as most items on the shelf are not even dollar prices, you’re pretty much guaranteed to have factional pennies coming into play. With the lasagna, if the shelf price was $11.99 instead of an even $12, the sales taxes would be 23.98 cents, 17.74 cents, and 16.54 cents.

So including the sales taxes in the shelf price introduces a bit of a dilemma when you start talking about far more than just one item.

Round down and you deprive the government of tax revenue it’s entitled to by law when you aggregate that rounding across billions of line items per day. With the lasagna, rounding down would mean 17 cents and 16 cents on the county and city taxes, respectively, or 57 cents total taxes collected. And if the shelf price was $11.99 instead of an even $12, it would be 56 cents total since the 23.98 cents would be rounded down to 23 cents.

Round up, though, and the government collects more than the law permits. Which is illegal.

Round off at all, up or down depending on where the numbers fall, and it could go either way. In the example with the $11.99 shelf price, all three taxes would be rounded up, meaning, again, the government would be collecting more than the law allows.

The best way to ensure the tax calculation is fair to all parties involved is calculating the sales tax across the aggregate totals of eligible items at the register, then rounding to the nearest penny. This also avoids the complication of having to account for fractions of a penny in the inventory and pricing systems, which likely aren’t coded to accommodate that. Along with separate values being tracked for each sales tax collected, meaning separate aggregations.

It’s just easier, overall, and more fair calculating the taxes on the subtotal.

Sure it does mean you can’t know till the final total how much you’re going to be spending, and people have been burned by that. But that’s also why you should keep a ballpark percentage in your head of how much over the shelf price you’ll likely be paying for something.

If you’re only paying one sales tax, and that sales tax doesn’t result in fractions of pennies (which can only happen if all shelf prices are even dollar amounts), including it in the shelf price is relatively easy. But we aren’t doing that in the United States.

But that also doesn’t mean we’re doing sales taxes wrong, which is largely the implication whenever anyone points out that the United States is doing something different from the rest of the world.