6 differences between VAT and US sales tax
- Jan 17, 2021 | Richard Asquith
VAT is imposed in around 170 countries, whilst the US remains the only major economy with a turnover tax - 'sales and use tax'. They are both complex in parts, but in very different ways. Below you can learn about the major variations, and how to stay compliant across both.
This blog is an extract from Avalara's comprehensive US sales tax for Europeans guide which covers all you need to know about sales tax to successfully sell into the US.
Avalara is offering a free 90-day trial of its US sales tax software, AvaTax. Learn how easy it is for you to automate your taxes and stay focused on your business growth.
What’s the same?
US sales tax and VAT are taxes on the final consumer, collected by businesses on behalf of the government.
In both cases, if you are selling to local consumers as a foreign supplier, you will likely have to register as a non-resident or ‘remote’ taxpayer. There has been a coming together recently between sales tax and VAT on the rules on determining if tax applies based on where the seller is located, ‘nexus’ in US terminology. Once registered for sales tax or VAT, you will have to:
- Accurately calculate and charge the tax ;
- Submit regular returns, summarising sales and taxes due; and
- Remit any tax payable to the appropriate tax authorities.
But that’s where the similarities end. Both VAT and sales tax are complex; but for different reasons. Here are six major differences.
1. Sales tax is state level, plus thousands of local jurisdictions; VAT is only levied at the country level.
Sales tax is set by the US states – 45 of the 50 US states, plus DC, have a sales tax. However, and this is where sales tax gets very cluttered. Countries, cities and a number of other special jurisdictions (in excess of 12,000) have the right to set and charge tax on the transaction on top of the state sales tax.
This makes the determination of the right sales tax rate a huge challenge as the business must determine exactly which jurisdictions’ taxes apply, and how to combine them. VAT is controlled and levied at the federal government only.
2. Huge diversity of sales tax rates, with frequent changes; Only three or fewer VAT rates.
As there are thousands of US sales tax jurisdictions which often, confusingly, overlap each other, there is a huge combination of rates.
This is compounded by the states, counties and cities making no attempt to harmonise the rates they charge on the same products. Lastly, US states and tax juristictions like to tweak their sales tax rates frequently - often monthly in states like Alabama.
This makes calculation even more complicated given the likelihood that rates have changed. VAT rates are simple to track - pretty much every country as has a single, standard rate for most goods and services.
There are then typically two reduced rates on basic foodstuffs and public services. These tend not to change from year-to-year.
3. Sales tax only on final consumer; VAT is collected on all transactions.
This is where sales tax is ‘simple’. It is only charged on the final consumer (at the till or online checkout).
A business or other exempt entity may provide its official ‘exemption certificate’ to a seller to adjust this to zero. VAT is far more complex. It is charged throughout the supply chain from the first sale down to the final purchase by the consumer, so B2B as well as B2C sales.
4. VAT is collected by the business; sales tax could be the marketplace’s obligation too.
The seller of goods or services is responsible for VAT calculation and collections even when sold via an online marketplace platform. In the US, most states now impose a sales tax collection obligation on the marketplaces for their remote sellers.
The marketplace obligation rules vary between the states on whether the platform must collect the tax, which adds to the complexity of getting taxes right.
It is important for the seller to track when a marketplace has withheld the sales tax to avoid double tax reporting and losses.
Businesses have the right to deduct the VAT they have been charged against the VAT they then levy on their own customers. This is done via the regular VAT return and VAT’s factional collections process helps cut fraud.
It does however make VAT complex, especially on international sales where it is not always clear which country’s VAT rules and rates apply to the sale.
5. VAT is due on digital services; but it may be exempt for US sales tax
In Europe, and increasingly throughout the rest of the world, VAT is levied on digital or e-services. These include:
Streaming or download media
Apps; e-books and publications
Advertising; membership to online clubs
Most e-learning; SaaS software; and data storage
The US sales tax regime is further behind on these new offerings. Around 30 States are only just beginning to charge sales tax on ‘digital goods’, as they are known. Again, rates and rules vary enormously between the different sales tax jurisdictions.
6. US consumer use tax is not to be forgotten
In the US, to capture missing taxes not collected by remote sellers, or where businesses consume their own tax-free stocks, states created consumer use tax.
Any consumer not charged sales tax by a remote business must report and pay to their state or tax jurisdiction the sales tax.
The same for the businesses using their own stock which they had bought tax-free for resale. VAT has no similar requirement on consumers. There are self-supply VAT reporting rules, but there is no tax cash payment due.