Which statement best describes how the tax amount in the example is determined?

Which statement best describes how the tax amount in the example is determined?

• A. Tax is calculated on the pre-tax amount
• B. Tax is calculated on the total after tax
• C. Tax is a fixed amount
• D. Tax is included in the price

Answer: (A)

Tax is typically determined by applying the tax rate to the price before tax. You take the item’s pre-tax amount and multiply it by the tax rate to get the tax, then add that to the pre-tax price to get the total. For example, if the item costs 40 and the tax rate is 7.5%, the tax would be 40 × 0.075 = 3, and the total would be 43. Calculating tax on the total after tax would double-count tax, and a fixed tax amount wouldn’t scale with price. Tax included in the price means the shown price already includes tax, so the tax amount isn’t computed separately from the pre-tax price. So the tax is determined on the pre-tax amount.

Tax is typically determined by applying the tax rate to the price before tax. You take the item’s pre-tax amount and multiply it by the tax rate to get the tax, then add that to the pre-tax price to get the total. For example, if the item costs 40 and the tax rate is 7.5%, the tax would be 40 × 0.075 = 3, and the total would be 43. Calculating tax on the total after tax would double-count tax, and a fixed tax amount wouldn’t scale with price. Tax included in the price means the shown price already includes tax, so the tax amount isn’t computed separately from the pre-tax price. So the tax is determined on the pre-tax amount.