Pricing Strategies: Can I Include Sales Tax in My Prices?

Barkin Doganay · February 9, 2024 · 5 min read

"In today’s competitive market, transparency isn’t just appreciated—it’s expected. Customers want to know exactly what they’re paying, with no surprises at checkout." [1]

You’ve spent countless hours developing your product, setting competitive prices, and expanding sales across multiple states or internationally. But just as your sales start to pick up, tax compliance issues surface—unexpected obligations, potential penalties, and the challenge of keeping up with complex tax rules in each jurisdiction.

For a CFO or head of finance, sales tax compliance impacts everything from pricing to customer trust.

That’s why many business leaders like you ask a critical question: Should I include sales tax directly in my prices? This choice has far-reaching implications for customer satisfaction, your competitive edge, and the compliance processes.

In this article, we’ll dig into the ins and outs of including sales tax in your prices, weigh the pros and cons, and share insights from industry experts and research. Let’s explore what this decision means for your business.

How Sales Tax Plays into Pricing Decisions

Sales tax is a key part of any business's revenue model. In 2022, U.S. state and local sales tax collections reached over $509 billion, a vital funding source for services and infrastructure [2]. For SaaS companies and e-commerce businesses, handling sales tax goes far beyond an administrative checkbox—it’s central to how you price your products and build trust with customers.

The spread of economic nexus laws across 45 states, where businesses must collect sales tax even without a physical presence, has made things even trickier [3].

In light of these regulations, finance leaders must decide whether to absorb sales tax within product pricing or add it at checkout. Each approach comes with its own set of customer and operational impacts.

"For multi-state businesses, handling a web of over 10,000 local tax jurisdictions can be a huge challenge without the right tools" [4].

Why Some Businesses Prefer Inclusive Pricing

Tax-inclusive pricing—where the sales tax is folded into the listed price—can offer real benefits, especially for decision-makers focused on creating a frictionless customer experience.

Research shows that 56% of consumers prefer tax-inclusive prices since they simplify their buying decisions [5].

By making it easy for customers to understand total costs upfront, businesses can help avoid unexpected charges at checkout.

"Including sales tax in the price can ease consumer friction at point of sale, fostering a smoother transaction experience" [6].

So, is inclusive pricing right for you?

The Pros of Tax-Inclusive Pricing: Clarity, Trust, and Simplicity

Inclusive pricing has significant benefits for businesses focused on clarity and ease of purchase. Customers see a single, straightforward amount by integrating sales tax into the listed price. Whether in a fast-paced retail environment or with SaaS subscriptions, tax-inclusive pricing can help simplify transactions and reduce friction at checkout.

Customer Trust and Transparency: Customers appreciate seeing a clear price with no surprises. In fact, a survey found that transparent pricing can reduce cart abandonment rates by as much as 20% [7].

Quicker Checkout: By eliminating the extra tax step at checkout, customers experience a faster, easier transaction. This is especially useful for high-volume or subscription-based businesses [8].

"Transparent pricing that includes tax can increase consumer satisfaction by reducing the mental load of last-minute cost calculations" [9].

The benefits of tax-inclusive pricing—better transparency, faster transactions, and increased trust—are especially appealing for companies aiming to streamline the customer experience.

The Edge of Transparent Pricing in Competitive Markets

When customers see that the price listed is what they’ll pay, they’re more likely to trust your business. This clear, no-surprises pricing type can set you apart, especially if competitors add tax at checkout.

Studies show that 56% of consumers prefer this type of tax-inclusive pricing, which can speed up their decision-making [10]. By showing customers exactly what they’ll pay, you convey respect for their time and make their decisions easier.

"A single price that reflects all costs, including taxes, can significantly enhance consumer trust, particularly in transparent markets" [11].

Price Perception and Compliance Challenges

While tax-inclusive pricing has its perks, there are downsides to consider. The main concern is how it affects your competitive position. Higher, tax-inclusive prices can appear more expensive than competitors’ pre-tax prices, especially in online marketplaces where consumers compare products side by side.

When Higher Perceived Costs Are a Disadvantage

Price Sensitivity: Price-sensitive customers may avoid products with tax-inclusive prices, interpreting them as higher than those listed without tax.
Reduced Flexibility in Pricing: Tax-inclusive prices can make quick price changes more challenging when responding to tax rate changes or running promotions.
Transparency in Tax Details: Some customers want to see taxes itemized separately, which can provide more clarity on what they're paying.

"Understanding consumer psychology is essential; customers are more likely to choose a vendor who offers straightforward pricing" [12].

Embedding tax in prices can add compliance challenges for businesses operating in multiple jurisdictions. Each state or local jurisdiction has its own rates and rules, so keeping up with these variations requires extra adjustments—especially for SaaS and e-commerce companies that operate across various regions.

For more details on compliance across specific regions, see Texas State Sales Tax Nexus 2024 and Washington State Sales Tax Nexus 2024.

The Complexities of Multistate Operations

Adding sales tax to listed prices requires a flexible approach for businesses across multiple states. The U.S. has over 10,000 sales tax jurisdictions, each with unique rates and requirements. Companies operating in several states face an intricate system of rules that vary widely [13].

"The average penalty for failing to remit sales tax accurately can reach up to 25% of the owed amount" [14].

Embedding sales tax in your prices can present operational challenges for a CFO or head of finance. Managing these tax variations without robust compliance software or dedicated resources can lead to costly mistakes.

Setting a Pricing Strategy: Balancing Customer Clarity with Flexibility

The choice between tax-inclusive and tax-exclusive pricing models goes beyond numbers; it can reshape your business’s perception, customer experience, and compliance efforts. Inclusive pricing may appeal to customers looking for simplicity, but tax-exclusive pricing gives you the flexibility and transparency that can be valuable in competitive markets.

Tailoring Your Strategy to Your Market and Customers

Knowing your customer base is essential. Inclusive pricing can boost clarity and trust in industries like retail or online marketplaces, where price transparency is highly valued. On the other hand, for B2B SaaS transactions, separating tax can give budget-conscious clients a better breakdown of their costs.

Assess Competitor Pricing: Are competitors embedding tax in their prices or adding it at checkout?
Gauge Customer Preferences: Does your target market value tax-inclusive pricing for its simplicity or tax-exclusive pricing for transparency?
Consider Pricing Psychology: Inclusive pricing may simplify things, but some customers appreciate the detail provided by a separate tax line item.

"When businesses are transparent in their pricing, especially around taxes, customers experience a sense of trust and ease, which can be a deciding factor in high-stakes B2B transactions" [15].

Pricing for Clarity and Compliance

Deciding whether to include sales tax in your pricing is a big decision that affects how customers view your business and how well you comply with tax requirements. While tax-inclusive pricing may simplify things for customers, it also requires careful thought, especially for businesses with multi-state or international reach.

Whether you choose tax-inclusive or tax-exclusive pricing, consider customer expectations, your industry’s norms, and the regulatory environment. With tools like Kintsugi | Sales Tax Automation for Every Company Globally, which provides real-time tax calculations and tracks multistate sales, SaaS and e-commerce CFOs can keep these moving parts in check.

Ultimately, the decision between tax-inclusive and tax-exclusive pricing should reflect both your business’s goals and your customers’ needs.