You are completely correct. Sorry for all the confusion. I interpreted both the VAT help text and the numbers incorrectly. “collect by itch.io” does indeed use exclusive tax.
To anyone reading this: I WAS CONFUSED, PLEASE IGNORE ME.
Viewing post in Why does Itch add UK VAT at 20% to RPG books?
Oh, it does read like you can activate taxes included. But in my experience, no one does this. Steam game prices for the US market are also taxes exclusive. Players are expecting it. But EU players rarly buy directly from Steam USA. They get regional pricing and if offered in the EU market, prices have to have taxes included when displayed to the customer.
You are not allowed to advertise consumer goods for sale to buyers in the UK or the EU without VAT included at the correct rate. The correct rate of VAT for books in the UK is zero.
BTW it doesn't matter where the site is, if you ship to the UK or EU you must display your prices inclusive of VAT at the correct rate at the point where the goods are displayed.
What you say is technically correct, but not applicable. Applicable law, including consumer protection laws, for this site is Californian law.
And those end user price tags that must include taxes are of the consumer protecion variety. This is of course my opinion and I am not a lawyer, but I would be very surprised, if I were wrong here.