Most countries in the world charge VAT, while the US remains an exception with its turnover sales tax. Both taxes are different, and in this article, we’ll look at the key differences between them.
Similarities Between VAT and US Sales Tax
Both VAT and sales taxes are paid by the end customer. Businesses collect them and then declare and remit them to the tax office.
If you’re operating as a foreign company, you’ll have to go through a tax registration process, and specify that you’re located elsewhere. After you complete your registration, you need to calculate and collect the correct tax (VAT or sales tax), file tax returns on regular intervals, depending on the country, and remit taxes to the tax office. These are the key similarities between both types of taxes.
Let’s now look at the differences between VAT and the sales tax in the US.
Differences Between US Sales Tax and VAT
1. US sales taxes are handled by state and local laws, while VAT is always collected by the national tax office
Different states apply different sales taxes. Most US states--45 out of 50--apply a sales tax. Cities and counties can also set and collect sales taxes, besides the state tax, which makes the entire system very complex. Determining the correct sales tax in order to comply with tax regulations becomes a huge challenge for businesses.
Contrary to that, VAT is always handled at a national level.
2. Sales tax rates vary a lot and are subject to frequent changes, while only a few tax rates exist for VAT
Given that there are so many different tax jurisdictions in the US (over 12,000), sales taxes often overlap, and the combination of possible rates is huge. States, counties and cities try to simplify the taxation rules and harmonize rates, which, in fact, often makes everything even more complex. Besides that, tax rates often change, which makes staying up to date a challenge.
VAT is simple to calculate: most countries have a single rate for most goods and services, with only a few exceptions—and even then, there are only 2 or 3 different rates.
3. Sales tax is collected from the end customer, while VAT is charged on all transactions
Sales tax is charged to the end customer only, which makes it relatively simple in this regard. VAT is charged at every step of the supply chain, for both B2B and B2C transactions.
4. Sales tax could be collected by marketplaces or by businesses, while VAT is generally the business’ responsibility
For remote sellers who sell to US customers on online marketplaces, it’s often the marketplaces’ responsibility to collect sales tax. This varies from state to state, though, and sellers need to track when marketplaces are collecting taxes. In regards to VAT, businesses need to calculate and collect it, even when they offer their goods or services via an online platform, which makes it a challenging task when selling in different countries.
5. Not all states collect sales taxes on digital services
In most countries, VAT is collected on all products and services, including digital services, such as advertising, online memberships, apps, streaming, e-learning, and more. In the US, however, not all states have begun to collect sales taxes on digital goods and services.
6. In the US, there’s also a consumer use tax
Many US states have a consumer use tax in order to collect taxes on transactions with remote sellers where no sales tax was collected, or for tax-free stocks. Consumers must report transactions where sales tax was not collected, and pay the missing tax. For VAT, there aren’t such requirements.
Fonoa Tax Can Help You With The VAT
The Fonoa Tax engine automatically determines the correct tax treatment for sales transactions anywhere in the world. After you provide minimal transaction data input, the tax engine will determine if the transaction is taxable, what tax rate applies, and the amount of tax that you need to charge for that transaction.