VAT and Sales taxes are two examples of indirect consumption taxes. State governments levy sales taxes on retail purchases of products or services that are not excluded from taxation. A value-added tax (VAT) is a consumption tax imposed on commodities at each stage of the manufacturing process until they are sold to consumers. This is not the only difference between the two, however.

Definition

A value-added tax, or VAT, is a consumption tax collected at each supply and retail chain level to produce government money. VAT levies a tax at every stage of manufacturing, from the acquisition of raw materials through their assembly. The total value-added at each point of sale is added to the final retail sale price, making the end-user liable for the full VAT.

Sales Tax is when a percentage fee is added to the price of products and services at the time of sale. It is a consumption tax—a general sales tax levied on the purchase of products or services—in which the tax is levied on the product’s end-user. Sales taxes apply whenever a firm has a sales tax nexus, a physical presence, or a volume of sales in a specific jurisdiction, whether a private small business or a distribution center for a major corporation. State and local governments charge taxes on commercial locations under their authority, but federal sales tax is not levied.

VAT vs. Sales Tax

One of the primary distinctions between a VAT and a retail sales tax is that a VAT is a flat tax rate applied uniformly, everyone pays the same percentage regardless of income—set by the national government. Instead of the federal government, state and local governments set sales tax rates.

Another is that VAT demands thorough documentation for every transaction, making it simpler to hold supply chain companies accountable for tax income. This can lessen the likelihood of tax avoidance. Because sales tax is only levied at the end of the supply chain, it is more difficult to trace throughout.

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