VAT (Value Added Tax)
Value Added Tax, or VAT, is a tax on the value added to a product, for example when a company buys products and sells them at a higher rate. The tax applies to the value increase itself. This applies to every transaction for the product in the entire chain, from producer to end consumer. All countries in the EU and a large part of the world use this system. Manufacturers, suppliers, distributors, and retailers all add VAT to taxable sales.
Sales tax
Sales tax applies only to the final sale of a product. The US is using this tax system. Tax is added by the retailer at the last point of sale in the supply chain. A major difference in this system compared to VAT is that no tax income is generated before the final sale. In the US, every state has their own tax rate, which means that significant differences occur depending on where in the country a business is located.
| Comparison | VAT | Sales tax |
|---|---|---|
| Tax is generated | Any time the value of a product is increased and the product is sold. | During the final sale of a product to the end consumer, based on the final value of the product. |
| Tax rates | Every country has their own, typically a handful of different rates. | Each state in the US has their own; one or several rates depending on the state, municipality and city. |
| Tax liability | Distributed among all sellers in the chain. | The final seller toward the end consumer. |
