Understanding How Sales Tax Is Applied to Discounted Items

When buying an item on sale, is the state and local sales tax calculated before or after the discount is subtracted?

The answer depends on the type of discount being applied:

1. Store Markdowns and Retail Discounts

For standard store sales (e.g., 25% off all electronics), sales tax is almost universally calculated on the discounted purchase price.

Example:

• Original tag price: $100
• 20% store discount: -$20
• Net taxable price: $80
• 8% Sales Tax: $80 × 0.08 = $6.40
• Total Checkout: $86.40

2. Manufacturer Coupons

In contrast, manufacturer coupons are considered third party reimbursements to the retailer in many jurisdictions. The retailer pays tax on the full original value in those states.

Knowing this distinction helps you calculate your exact out of pocket expenses when budgeting major shopping trips!