6 differences between VAT and US sales tax

Both value-added tax (VAT) and U.S. sales tax present challenges for businesses. Each has their complexities, but in different ways. Understanding the key differences between the two can help you manage your obligations for both taxes — especially if you’re used to dealing with VAT and are entering the U.S. market for the first time.

Let’s take a look at the top six differences. 

This is arguably the most important difference between VAT and U.S. sales tax. VAT is controlled and levied by governments at a national (federal) level. U.S. sales tax is set at the state level by each state that charges it (Alaska, Delaware, Montana, New Hampshire, and Oregon do not charge U.S. sales tax). This doesn’t mean there are a maximum of 45 rates to track, however. Counties and cities within a state are free to set their sales tax rules and requirements at the local level, creating more than 13,000 U.S. sales tax jurisdictions across the U.S. 

This brings us to…    

Countries with a VAT system typically have a national standard rate for most goods and services. The average national standard VAT rate across the world is 15-16%. In Europe, it’s 21-22%, with Switzerland being the lowest at 8.1% and Hungary being the highest at 27%. Countries with VAT also tend to have reduced and super-reduced rates that apply to things like basic foodstuffs and public services. Though VAT rates can change, they tend to stay the same from year to year.   

Those 13,000 U.S. sales tax jurisdictions we mentioned? There’s little attempt between cities, counties, and states to harmonise the sales tax rates they charge on the same products. Shoes you purchase in California can have a different rate to shoes in Tennessee. Further, shoes in California’s capital Sacramento can have another rate, and further still the rate can differ again in Nashville, Tennessee. These jurisdictions also change their rates much more frequently than VAT. In fact, there were almost 12,000 rate changes across the U.S. in 2023. This makes rate calculation a huge challenge for businesses, and unenviable work for someone to tackle manually.  

VAT is collected at every stage of the supply chain: production, distribution, and retail. A wholesaler charges VAT to a retailer who then also charges VAT to the customer. Businesses collect VAT on sales (output tax) and deduct VAT paid on purchases (input tax), remitting the difference to the tax authority.

U.S. sales tax is only charged to the final consumer at the physical or online checkout. A business or other entity (such as a charity) may be entitled to an exemption. In this case, the buyer provides an exemption certificate, and the seller adjusts the U.S. sales tax rate to zero. Businesses remit the total amount to the appropriate U.S. state or local tax authority.

VAT includes an input tax credit system. This means businesses can recover the VAT paid on most business-related purchases (such as supplies and office equipment) by deducting the VAT on such purchases (input tax) from what they collect on sales (output tax).

U.S. sales tax does not have an input tax credit mechanism. However, businesses purchasing goods for resale can use resale exemption certificates to buy certain items tax-free.

Businesses with VAT obligations typically file either monthly or quarterly VAT returns, depending on annual taxable turnover thresholds set out by each country. Businesses are required to detail their input and output VAT and remit the net amount to the relevant tax authority.

Filing frequency for U.S. sales tax returns varies from state to state. It’s often based on the volume of taxable sales; however, there are likely to be differences regarding such requirements from state to state. Businesses must file returns and remit collected U.S. sales taxes to each jurisdiction where they have a tax obligation, and not a single national authority. 

Consumer use tax in the U.S. is a state-imposed tax on the use, storage, or consumption of goods and services. It can be applied when a buyer does not pay U.S. sales tax at the point of purchase, such as when buying online from an out-of-state seller, or when businesses bring untaxed goods into the state from a tax-free state. Consumer use tax helps to ensure that untaxed purchases don’t escape taxation altogether. The buyer is responsible for self-assessing and remitting consumer use tax when sales tax wasn’t charged at purchase.

VAT has no similar requirement for consumers. There are self-supply VAT reporting rules, but there is no tax cash payment due.   

VAT and U.S. sales tax have significant differences, but one thing remains the same: their obligations must be managed in the most effective way possible. Automation can help you solve the VAT versus sales tax conundrum. It can simplify the most burdensome tasks by helping you understand your obligations and alert you when you have new ones, calculate ever-changing rates and provide accurate prices at the point of sale, and flag important reporting deadlines so you never miss a filing date.  

Speak with an Avalara tax specialist today to learn more about how our solutions can help. You can also learn more about navigating the complexities of U.S. sales tax or how to streamline your VAT compliance.