What is the difference between VAT and Sales Tax besides when its added to the price?
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In the US sales tax is a state and county tax, no federal component. VAT is a national tax, I thought.
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Sales Tax is only on the final sale to an actual consumer.
VAT is more complex, it applies every step along the way. For instance, if you are a company making wooden tables?
With Sales Tax you only have to charge Sales Tax when you sell a table and then forward the tax to the government.
With VAT, you pay VAT on the wood you buy to make tables, AND you charge VAT when you sell a table, and at the end of every quarter you forward the difference between VAT you charged when selling and paid when buying, to the government.
So first of all I want to address something. Lots of people think that a sales tax is a tax that’s included in the posted price of an item where’s a VAT is not (might be the opposite, I can’t remember) but that’s false.
A VAT is a kind of sales tax, in Canada for example we have the GST/HST and it’s a VAT (value added tax) yet it’s not included in the listed price of an item. Most taxes in the US are sales tax and are also not included in the price of an item. In most of Europe they also have various VAT or sales taxes and for the most part they are included in the price of an item. Weather or not a tax is included in the posted price of an item is mostly down to it being a cultural thing and not at all to do with the kind of tax.
To the end consumer, a VAT vs a Sales Tax, it’s all exactly the same. The main differences between a VAT and a Sales Tax have to do with suppliers and resellers and how they are charged or not charged a tax.
With a Sales Tax, it only applies to the end user of goods. And so people who sell things need to prove that they sold something to someone who’s not an end user. This means keeping paperwork like business licenses for sales where no sales tax is charged. Lots of record keeping so that when the government comes around and asks why you didn’t charge sales tax on this sale, you can prove to them that there was a reason.
This, obviously, is a large pain in the ass. Lots of paperwork and most importantly for the government lots of ways to cheat the system. It’s a paperwork and auditing problem since it’s basically just constantly having to prove people’s identity with normal every day transactions.
A VAT, at it’s core, is much more simpler because everyone pays it the same. Some people are allowed to claim a credit for VAT that they pay, but they must charge full VAT to everyone (some exceptions apply).
Lets look at a simple transaction. Say I make face masks and sell them at a local market.
I purchase $100 of fabric and other supplies. With these supplies I make 100 masks and sell them for $2 each. So I have a total of $200 in revenue, and $100 in profit.
In a VAT based system with a 15% tax rate, I would pay $115 for those supplies and I would keep the receipt showing I paid $15 in tax. I would then sell all my masks to customers for $2.30 ($2+15% tax), I would have collected a total of $230.
Now I fill out my VAT return, on that paperwork I say that I paid $15 in VAT for my supplies and I collected $30 in VAT from my customers and I sent the government a cheque for $15.
Keep in mind here, I don’t care who bought those masks and my fabric supplier never asaked who I was and what I was doing with the fabric. Everyone got charged the tax.
Under a sales tax it would be much different. My fabric supplier would have askes for some kind of identification proving I was buying this fabric for a reselling business. I would have provided them that ID and they would have to keep it incase the government ever asked. But I only would have had to pay $100 for that fabric, not the $115 I did in the VAT example.
When I sold the masks I found out that actually my biggest customer is my friend Rob, Rob owns a corner store and he resells my masks in his store for $3 each. This is fine with me, Robs a good customer. Only under a sales tax system I need to record every mask that I sell Rob and keep his business ID and be able to prove to the government that Rob is actually a reseller.
So under a sales tax system, it’s only end users who are supposed to be charged the tax. But keeping track of who is an end user and who’s not and who should be charged the tax and who should not is complicated and a pain in the ass. It’s also VERY difficult for government to catch cheaters because of all these recordkeeping requirements.
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