Understanding how discounts and sales tax interact is essential for both consumers and businesses. The calculation follows a specific order of operations that affects the final price.

The Order of Operations

1. Apply the discount first: Discounts are calculated on the original price before tax.
2. Calculate tax on the reduced amount: Sales tax or VAT is applied to the price AFTER the discount is subtracted.

Why This Matters

For consumers, a 20% discount followed by 10% tax does NOT equal a 10% net savings. The tax is calculated on the discounted price, so your actual savings are greater than the discount percentage suggests.

For businesses, this means you collect less tax when you offer discounts, since tax is based on the reduced transaction amount.

Formula Breakdown

• Discount Amount: Original Price × (Discount % / 100) or Fixed Amount
• Price After Discount: Original Price − Discount Amount
• Tax Amount: Price After Discount × (Tax Rate / 100)
• Final Price: Price After Discount + Tax Amount