Sales taxes, invoices and discounts

Every sale between businesses produces an invoice, and nearly every invoice involves three kinds of calculation: discounts off a list price, sales tax on the result, and the terms that say when payment is due and what reward is offered for paying early. Getting these right matters to both sides. A buyer who misses an early-payment discount is paying an expensive hidden interest rate, and a seller who charges the wrong tax can owe the difference out of its own pocket. This lesson covers sales taxes, trade discounts, cash discounts and the anatomy of an invoice.

Sales taxes

The United States has no federal sales tax. Sales taxes are set by states, and in most states counties, cities and special districts add their own local rates, so the combined rate depends on the exact location of the sale. Five states (Alaska, Delaware, Montana, New Hampshire and Oregon) have no statewide sales tax, although Alaska allows local sales taxes. The rates below are state base rates at the time of writing (October 2026); always add the local rate for the delivery address.

US sales taxes are retail sales taxes: they are charged once, on the sale to the final user. A business buying goods to resell gives the seller a resale certificate and pays no sales tax on that purchase; it collects tax from its own customers instead. When a buyer purchases taxable goods without paying sales tax, for example from an out-of-state seller that did not collect it, the buyer usually owes use tax at the same rate. Since the Supreme Court's 2018 decision in South Dakota v. Wayfair, states can require remote sellers to collect tax once they pass an economic threshold, commonly $100,000 of sales into the state.

Sales tax arithmetic is simple percentage work. Tax = taxable amount × rate, and the total = taxable amount × (1 + rate). The reverse calculation, recovering the pre-tax price from a tax-inclusive total, divides by (1 + rate). A frequent mistake is to take the rate off the total instead, which gives too small a price and too much tax.

Trade discounts

Manufacturers and wholesalers often publish a list price (a catalog or suggested retail price) and then give each type of customer a trade discount off that list. Retailers might get 40 %, wholesalers 50 %, and large buyers an extra discount on top. Trade discounts are not a reward for anything; they are simply how the seller sets the price for each class of buyer. Publishing one list and varying the discounts lets the seller change prices without reprinting the catalog.

When several trade discounts are offered in a chain, such as 25 %, 10 % and 5 % (often written 25/10/5), each discount applies to the price left after the previous one. The discounts must not be added. Instead, multiply the complements to get the net cost factor (NCF). The single equivalent discount is one minus the NCF.

The order of the discounts in a chain does not matter, because multiplication is commutative: 25/10/5 gives the same price as 5/10/25. What matters is that each later discount is taken from a smaller base.

Cash discounts and terms of payment

Once goods are sold on credit, the invoice states the terms of payment. A common form is 2/10, n/30, read as 'two ten, net thirty': the buyer may take a 2 % discount if it pays within 10 days of the invoice date; otherwise the full (net) amount is due within 30 days. The 10-day window is the discount period and the 30 days is the credit period. Variations include 1/15, n/45; 2/10 EOM (10 days after the end of the month); and n/60 with no discount at all.

A buyer that cannot pay the whole invoice inside the discount period may make a partial payment. The usual rule is that each dollar paid within the discount period settles more than a dollar of the invoice. With a 2 % discount, a payment of $98 settles $100 of the invoice, so the amount credited is the payment divided by (1 − d).

The real cost of skipping the discount

A 2 % discount sounds small, but it is a large reward for paying 20 days early. If the buyer skips the discount and pays on day 30, it is in effect borrowing $98 from the supplier for 20 days at a cost of $2. Annualizing that cost shows how expensive it is.

Reading and building an invoice

An invoice lists each item with its quantity and unit price; the product of the two is called the extension. The extensions are added to a subtotal, trade discounts are applied, shipping charges are added, and sales tax is calculated on the taxable amount. The terms of payment and shipping terms appear at the top or bottom. FOB (free on board) shipping point means the buyer owns the goods once they leave the seller and pays the freight; FOB destination means the seller pays the freight and owns the goods until they arrive.

# Invoice calculator: extensions, trade discount, freight, tax, cash discount
items = [("Desk lamp", 40, 18.75), ("Filing cabinet", 12, 64.50), ("Office chair", 6, 129.00)]
trade, freight, cash = 0.20, 85.00, 0.02
subtotal = sum(q * p for _, q, p in items)
net = round(subtotal * (1 - trade), 2)
for rate, freight_taxed, label in [(0.13, True, "Ontario HST 13%"), (0.0725, False, "Ohio 7.25%")]:
    base = net + (freight if freight_taxed else 0)
    tax = round(base * rate, 2)
    total = round(net + freight + tax, 2)
    early = round(total - net * cash, 2)
    print(f"{label}: subtotal {subtotal:.2f}, net {net:.2f}, tax {tax:.2f}, total {total:.2f}, pay early {early:.2f}")
print(f"Implied rate of skipping 2/10, n/30: {cash / (1 - cash) * 365 / 20:.1%}")

Ontario HST 13%: subtotal 2298.00, net 1838.40, tax 250.04, total 2173.44, pay early 2136.67
Ohio 7.25%: subtotal 2298.00, net 1838.40, tax 133.28, total 2056.68, pay early 2019.91
Implied rate of skipping 2/10, n/30: 37.2%