Sales and use taxes in the United States and the value-added tax (VAT) used in most other countries have some similarities and differences.
- Both sales and use taxes and VAT are indirect taxes, meaning that they are levied on the sale of goods and services rather than on the income of the seller or buyer.
- Both taxes aim to tax the value added at each stage of the production and distribution chain. This means that only the value added by the seller at each stage is taxed, and the seller can recover the tax paid on inputs by charging it to the buyer.
- Both taxes are typically levied at a percentage of the sale price of goods and services.
- Coverage: VAT is used in most countries around the world and covers a wide range of goods and services. In contrast, sales and use taxes in the United States are imposed at the state and local level, and the coverage of goods and services subject to tax can vary significantly from jurisdiction to jurisdiction.
- Administration: VAT is typically administered by the national government, while sales and use taxes in the United States are administered by each state and local jurisdiction. This can result in significant variations in the rules and procedures for complying with the tax and can create additional compliance costs for businesses operating in multiple jurisdictions.
- Registration: In most countries with VAT, businesses must register for VAT and file regular VAT returns, while in the United States, businesses may be required to register for sales and use taxes in each jurisdiction where they have a taxable presence.
- Rates: VAT rates in most countries tend to be uniform across the country and are set by the national government, while sales and use tax rates in the United States can vary significantly from jurisdiction to jurisdiction and can change frequently.
Despite these differences, both sales and use taxes in the United States and VAT in other countries serve the same primary purpose of taxing the value added at each stage of the production and distribution of goods and services.
Businesses need to understand their tax obligations, including the frequency of returns and the potential penalties for not filing returns, in each jurisdiction where they have a taxable presence. PMBA can assist businesses with their sales & use compliance obligations.