Sales Tax vs VAT: What Is the Difference?
Sales tax and VAT both tax spending, but they work very differently. See who collects each one, when, and why businesses can reclaim VAT but not sales tax.
Both sales tax and VAT (value-added tax) are taxes on spending, and customers pay both at the till. Behind the scenes they work very differently, and the difference matters if you sell to customers in more than one country.
The short answer
- Sales tax is collected once, at the final sale to the consumer.
- VAT is collected at every stage of the supply chain, and each business reclaims the VAT it paid on its purchases.
The United States has state and local sales taxes but no national VAT. The UK, the EU and many other countries use VAT.
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An example with a 20% rate
Say a product passes from a supplier to a retailer to a customer.
| Step | Sale price | Tax charged | Under VAT, tax paid to the government |
|---|---|---|---|
| Supplier sells to retailer | 100 | 20 | 20 |
| Retailer sells to customer | 200 | 40 | 40 − 20 = 20 |
Under VAT the retailer collects 40 from the customer, reclaims the 20 it paid the supplier, and sends the other 20 to the tax authority. The government receives 40 in total, which is 20% of the final price of 200.
Under a 20% sales tax, only the last sale is taxed. The retailer buys from the supplier without tax, charges the customer 40 and pays all 40 to the government. The total is the same, but it is collected in a different way.
Side by side
| Sales tax | VAT | |
|---|---|---|
| Where it applies | Final sale to the consumer | Every stage of production and sale |
| Can businesses reclaim it? | No, businesses buying for resale use exemption certificates | Yes, as input VAT |
| How prices are shown | Usually added at checkout | Usually included in the shelf price |
| Who sets the rate | States, counties and cities (in the US) | The national government |
Why it matters on invoices
If you sell in a VAT country, your invoice must usually show the net price, the VAT rate, the VAT amount and the gross total. In the US, a sales tax line is added to the sale when the item is taxable. Calculating either one comes down to the same math: multiply by the rate to add tax, or divide the total by 1 plus the rate to remove it.
FAQ
Does the US have VAT?
No. The US has no federal VAT or federal sales tax. Sales tax is set at the state and local level.
Can a US business reclaim sales tax?
Generally no, because sales tax is meant to be paid once, by the final buyer. A reseller can buy goods without paying sales tax by providing a valid resale certificate.
Which is higher, sales tax or VAT?
It depends on the place. Rates vary widely, so compare the rate for the specific location rather than the type of tax.
Is this tax advice?
No. It is a general explanation. Rules differ by jurisdiction, so check with a tax professional for your situation.