Whether you're toting up sales tax, excise taxes or the "sin tax" on items like cigarettes, all taxes are calculated as percentages. When you calculate the after-tax cost for goods or services, you need two pieces of information: The tax rate (which is expressed as a percentage) and the before-tax price of the item being taxed. The calculation is simple enough that you can do it with pencil and paper, but of course using a calculator makes it faster.
Convert the Tax Rate to Decimal Form
Divide the percentage tax rate by 100 to convert it to a decimal. So if you're calculating a 7 percent tax rate, you'd have 7 ÷ 100 = 0.07. If your tax rate is already expressed as a decimal, you can skip this step.
Multiply by the Tax Rate
Multiply the item's pre-tax price by the tax rate, expressed as a decimal. So if the item in question costs $25 and is taxed at a 7 percent rate, you have $25 × 0.07 = $1.75. This is the amount of tax to be added to the item's price.
Add the Tax to the Original Price
Add the tax amount to the original item's price. To conclude the example, you have $25 + $1.75 = $26.75 as the post-tax price.
Checking Your Work
You can check your work by dividing the post-tax price by 1 (which represents 100 percent of the pre-tax price, converted into decimal form) plus the tax rate expressed as a decimal. In the example just shown, that means dividing by 1 + 0.07 = 1.07. Because the post-tax price represents 107 percent of the original price, dividing by that percentage (expressed in decimal form) brings you back to the pre-tax price.
A Shortcut for Calculators
If you're working this problem with a calculator, you can use the "check your work" concept above as a shortcut. Instead of multiplying the original price by the tax rate and then adding that to the pre-tax price, simply multiply the pre-tax rate by 1 + the tax rate expressed as a decimal. So in the original example, you'd multiply the pre-tax price of $25 by 1.07 to get $26.75. If the pre-tax cost of an item was $40 and the tax rate was 8 percent, you'd calculate $40 × 1.08 = $43.20.