Q: What is Value-Added Tax (VAT)?
Value-Added Tax (VAT), known also as a Goods and Services Tax (GST), is a country-specific tax on products and services.
In the United States, we are familiar with sales and use tax used in most US states and municipalities. While there is currently no federal value-added tax (VAT) on goods and services in the United States, many countries assess a VAT — also known as a Goods and Services Tax (GST) — on all goods, products, and services. VAT is charged at every point in the supply chain where value has been added (hence, value-added tax).
How does value-added tax (VAT) differ from sales tax?
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Sales tax is collected by the business when the final sale in the supply chain is reached via a sale to the end user or consumer. End users / customers pay the sales tax on their purchases. The business is then responsible for remitting the collected sales tax to the appropriate tax authority or authorities.
In contrast, value-added tax (VAT) is collected by all sellers at every stage of the supply chain. All companies — suppliers, manufacturers, distributors, retailers — and end users / customers all pay VAT on their purchases. While end users / consumers cannot deduct VAT from their taxes, businesses up the sales chain can receive a tax credit for their VAT paid if they have documented all VAT paid on purchases.
Which US states or jurisdictions have a VAT?
Michigan previously had a form of VAT known as Single Business Tax (SBT), which was repealed in 2008.
Currently, Puerto Rico is the only US jurisdiction with a value-added tax. This was enacted in April 2016 at a rate of 10.5% VAT.
Lastly, Hawaii has a 3% General Excise Tax (GET) that is very similar to a VAT. The Hawaii GET is charged on the gross income of any business (including sole proprietorships) generating income within the State of Hawaii. The Hawaii State Department of Taxation allows businesses to pass on this tax burden by charging their customers an effective “sales tax” of 4.166%. It’s important to note that the total tax burden on each product or service sold is substantially more than the 4.166% charged since GET is charged at each point in the sales chain.
Which countries charge a VAT?
While more than 160 countries worldwide use VAT, it is most commonly found in the European Union (EU). The average VAT rate in the EU is 20 percent, while other regions of the world have generally lower VAT rates. Some countries refer to the tax as Goods and Services Tax (GST) or General Sales Tax (GST).
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Updated: January 14, 2021
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.