What’s The Difference Between Sales Tax and Value-added Tax?

Updated on July 20, 2022

World map and international business arrows

For enterprises in the United States, various taxes are exempted along the supply chain. The value-added tax, on the other hand, is widely used in many countries around the world.

Aspiring tax professionals should be aware of the significant disparities between domestic and international taxes.

What is sales tax?

Finally, a shop is accountable for collecting and remitting the appropriate sales tax.

The final consumer is ultimately responsible for paying the bill. When it comes to taxes, it’s common practice to only charge them on items that are specifically specified. For the lifetime of a single consumer, data on a product or service is only gathered once.

Taxes must be paid by both sellers and producers, regardless of whether or not they are exempt.

Purchases of safety gear for a company’s personnel are subject to sales tax, even though the components used in their production are exempt. Because it is not a part of the final product, equipment is not excluded.

The following are normally exempt from sales tax:

Things that can be sold again, or the components to build them, can be purchased.
Items for sale are transported in containers and packaging. Equipment and machinery that has been utilized directly

In some cases, the same item may be subject to a second charge of sales tax.

Buying a brand new car might need paying sales tax, for example. If you ever sell the car to someone else, you’ll have to pay an extra tax. This will continue until the vehicle is sold.

Foreign visitors to the United States are often surprised when sales tax is not included in the listed price of retail goods.

In contrast to many European countries, the definition of taxable goods differs from jurisdiction to jurisdiction in the United States and its territories.

Sales tax is not imposed on clothing purchases in the following states: Minnesota; Pennsylvania; New York; Vermont; Massachusetts; and New Jersey.

Most countries do not charge sales tax on food or medicine. There is no state sales tax in any of the four states listed above.

The state of Alaska does not impose a sales tax, but local governments are free to impose their own. In Michigan, Maryland, Kentucky, and Idaho, local laws are forbidden while state taxes are levied.

Tax authorities faced a series of new challenges as the internet became a major economic force.

Uncertainty about which tax rates apply to particular things has risen as more consumers shop for goods from outside their home nation.

As recently as 1992, states were prohibited from collecting sales tax on goods sold over the internet unless they were sold in jurisdictions where the merchant had a physical presence.

In June 2018, the Supreme Court overturned the verdict, saying that internet-based enterprises may now more easily determine where clients are located and hence collect the appropriate sales tax.

What is value-added tax?

A value-added tax (VAT) is levied on every step of the supply chain (VAT).

To put it another way, distributors, wholesalers, manufacturers, and retailers are all taxed on eligible sales.

Because it only cares about international trade, the United States does not implement a value-added tax. Certain countries, such as Canada, refer to taxes on goods and services as VAT (GST).

In order to understand how VAT works, think about the production of a personal computer.

Raw materials are bought by a component producer from a supplier.

Third-party software is also installed on the computer, which is assembled by another company. A retail store’s business model revolves around purchasing computers in bulk and reselling them to individual clients.

The product’s worth increases with each level.

The whole amount of the product is not included in value added tax (VAT). So retailers are held to account for the value added by component makers when they buy PCs from a computer corporation.

The accompanying example demonstrates a VAT method based on invoices.

Many countries use it as a standard tool. Some countries, such as Japan, operate on a different system.

Before subtracting any taxable purchases, accounting-based approaches require businesses to compute the entire worth of all sales. The difference is then subject to VAT.

Different countries have different VAT rates and exemptions.

To pique your interest, here is the following information:

19 percent tax and 7 percent tariff are the tax rates in Germany.
In the United Kingdom, taxes range from 0% to 15%.
In China, taxes and levies can be as low as 0% and as high as 35%.
VAT in Russia is 18%, with levies ranging from 5% to 20% of the total cost.
In India, taxes can range from 0% to 30%.

The requirement for sufficient documentation is a significant difference between sales tax and VAT.

The local government determines the sales tax rate and automatically adds it to the bill in a retail setting.

Customer disputes are not allowed, and tax rates cannot be changed by customers.

Businesses must keep precise records in order to claim VAT credits.

If the paperwork provided by one company matches that provided by the other companies in the supply chain, an audit is more likely. Because of the VAT system, businesses are encouraged to keep track of their taxes in order to prevent overpaying or taking on too much debt. Tax exemptions must be carefully documented to avoid an audit.

Tax consultants who are fluent in both domestic and foreign tax laws are essential for multinational corporations.

If you’re interested in taxing entities, Northeastern’s online Master of Science in Taxation program contains two courses on international transactions: one on inbound international transactions and one on outbound.

In order to deal with the intricacies of international tax regulations, the online Master of Science in Taxation degree can help.