The VAT-regime in Europe and the sales tax-system in the US are both designed as transactional consumption taxes with the aim of taxing the final supply of a good or service provided to an end-consumer. The two indirect tax regimes share many common traits but there are a few important distinctions in how they operate.
VAT is typically applied at each stage of a supply chain, with businesses having the opportunity to reclaim VAT on purchases in order to obatin cost-neutrality. The US sales tax should ultimately yield the same result of cost-neutrality, but the mechanism for this is different. Here, there is no credit-system. Rather, only the ultimate final sale to an end-consumer is charged with sales tax.
The VAT-treatment on a sale is typically dependent on the supply being B2C or B2B. This distinction is of less importance in the US sales tax system. Here, the focus is on who the end-consumer is and this can be either an individual or a business. Buyers who are not end-consumers should generally provide resale or exemption certificates to sellers in order to substantiate their “non-taxable” status in relation to a sale.
The VAT-regime is generally closely linked to import/export terms and conditions, and Incoterms are often referenced. The terms of import/export, title-passage, etc. are not as significant for US sales tax purposes. Here, it is rather more important to understand to where a good or service is shipped or delivered. The delivery address is typically the driving force behind the taxability of a product in the US.
These are only a few select distinctions, but ones that I often get inquiries about. Let me know what else you’d like to know!
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