Although there are some similarities between
the U.S. sales tax and a VAT system, there are many differences.
For foreign sellers that are just beginning to sell into the U.S. market, there
is much to know. In addition to understanding how U.S. sales taxes are applied,
foreign sellers need to be aware of their responsibilities as “tax collection
agents”, that a uniform tax rate does not apply across the entire the United
States, or that sellers can be subject to severe penalties for not fulfilling
their responsibilities.
Yes, there is a lot to know! So in this post, I’ll provide
an overview of a few key concepts of the U.S. sales tax system and highlight
how the sales tax differs from a VAT. I’ll also provide a chart with some of
the key VAT versus sales tax differences.
Revisiting Nexus
I've previously explained that the U.S. sales tax system
allows each individual State to impose its own rules about
what is and what is not taxable and what sales tax rate should apply to a sale
transaction.
Previously, I also explained the concept of
"nexus", which is the "connection" that an out-of-state (or
foreign) company or seller must have to a specific State before the State can
tax or impose other duties on the company or seller. Having a sufficient
“nexus” gives a State the authority to require a seller (including a foreign
seller) to collect its sales tax. I also pointed out that having inventory or
employing the services of an independent agent in a state, are activities that
just about every state would consider to be a sufficient “nexus”. Finally, I have also previously highlighted that even though these same activities might not create a U.S.
Permanent Establishment (PE) because States are not bound by bi-lateral
treaties that the U.S. Government enters into, a foreign seller can still be
subject to the State's tax and requirements even if the seller is not subject
to federal taxation.
Key Comparisons Between Sales Tax and VAT
Once a foreign company/seller is found to have nexus to a
specific state, the company/seller must comply with the requirements of that
state. Therefore, the first thing to highlight in today’s post is that sales
tax is not a tax on the seller. When a seller has a sufficient
nexus to a state, the seller has a responsibility to collect the
tax due on the sale transaction if the purchaser is the final consumer of the
product or service. A general rule regarding whether sales tax is due on a
transaction is that sales of tangible personal property (TPP) are always taxable unless a
specific state exemption applies. (I’ll touch on sales tax exemptions in a
minute.) But TPP is more than just goods that can be held or seen. TPP subject
to sales tax can include digital goods, such as e-books and digital downloads,
or software accessed via the cloud. As a matter of fact, one of the most
controversial areas of sales taxation in the U.S. deals with whether and how
digital, cloud based, and SaaS products are taxed. But getting back to the
basics, one more general rule is that services are generally not subject
to tax. A service is only taxed if a State law specifically says that the
specific service is taxable.
Therefore, one way that a VAT compares to a sales tax is
that a VAT is generally imposed at every stage of production on all “business
inputs”. For instance, VAT is charged when raw materials are sold to a
manufacturer, again when the manufacturer sells his finished product to a
distributor, again when the distributor sells the product to a retailer and
once again, when the product is sold to the final consumer. Although to those
not familiar with a VAT, it may appear that the tax is collected/paid in full
multiple times, this isn’t the case. This is basically because VAT is charged
on the gross profit or value added each time the product moves through the
supply chain. What this means is that VAT is charged and collected in
increments as the products and/or services move to the final consumer. However,
sales tax is only charged and collected once – when the goods or taxable
services are sold to the final consumer at the total final sale price.
Foreign sellers accustomed to all business inputs being
taxed may wonder how it is that tax is not charged at each stage of production.
Here is yet one more difference between the U.S. sales tax and VAT system. In
general, many of the same business inputs that would be subject to VAT are
often exempt from sales tax. This is because many business inputs such as raw
materials, components that will integrated into another product, machinery
& equipment used in the manufacturing process, and finished inventory
purchased for resale, are generally exempt under the various State sales tax
laws.
This means that a seller is not required to charge and collect sales tax
upon the sale of an exempt business input as long as the purchaser provides a
valid exemption or resale certificate. The rules on which exemption certificate
must be obtained from a purchaser to excuse the seller from charging sales tax
are complex. Some states, such as Massachusetts, may have a single form which
can be used to claim a variety of different exemptions (click here to see Massachusetts Form ST-12, Exempt
Use Certificate. Notice the many business input categories listed on the form.)
Other states may have a different form for each type of business input (one
form for inventory purchased for resale, a different form for
machinery/equipment used in manufacturing, etc.) And some States accept a
general Multi-juridictional form.
So, in conclusion, today I touched on just a couple of ways
in which U.S. sales tax differs from VAT. Certainly there are more than just
these, but we'll leave those for another post! In addition to the brief
overview above, I've also created the following chart which summarizes these
main points.
Value Added Tax (VAT)
|
Sales Tax
|
VAT is an indirect tax charged/collected at each stage of
production.
|
Sales tax charged/collected only from the final consumer.
|
VAT is generally due on all "business inputs"
such as raw materials, machinery & equipment, supplies, business
services, etc.
|
Sales tax is often not due on "business inputs"
because these inputs often qualify for an exemption from sales tax, (e.g.,
resale, manufacturing, etc.)
|
Because VAT is collected at each stage of production, the
seller generally does not have a responsibility to verify whether the
purchaser is another producer or distributor or how the goods or services
purchased will be used.
|
The seller is responsible for collecting the sales tax
from the purchaser unless the purchaser provides the seller with a valid
certificate verifying that the purchase is for resale, or the goods or
services purchased qualify for an exemption.
|
In general, all business inputs, which include business
services, are subject to VAT.
|
In general, services are exempt from sales tax unless the
state or local jurisdiction lists the specific service as being taxable.
|
VAT creates an incentive to collect the tax because the
government only receives the tax on the gross margin of each transaction.
|
Sellers do not have a direct economic incentive to collect
sales tax.
|
Sylvia's Summation
The U.S. sales tax rules are
complex even for U.S. based companies – and can be even more confusing for
foreign sellers. And so, this is why I’ll be blogging about many different
sales tax topics with a focus on foreign companies/sellers. If you’re a foreign seller or foreign company and have specific topics in mind, I encourage
you to post your suggestions. Of course, questions and comments are
always welcome!
Like this post? Click on the "SHARE" link to
Share It on Social Media
If you would like to translate this post to a
different language, click on the menu above to open Google Translate and select
your language
Are you a foreign seller interested in a tax
consultation? Submit a contact request or email Sylvia Dion at
sylviadion@prietodiontax.com
This post was originally published on SalesTaxSuport* and is now available here at The State & Local Tax 'Buzz' Blog. This is one of several posts on U.S. Sales Tax for Foreign Sellers here at The State and Local Tax 'Buzz' Blog.
About the Author: Sylvia F. Dion, CPA
is the Founder and Managing Partner of PrietoDion Consulting Partners
LLC, a State & Local Tax (SALT) Consulting firm providing
comprehensive tax services to U.S. and International businesses. Sylvia’s 25
years of multi-faceted tax experience includes holding leadership positions
with some of the highest regarded international accounting firms and providing
SALT services to companies around the world. From 2011 through 2019, Sylvia
also served as a contributor to the SalesTaxSupport* blogs, where she blogged
on Internet Sales Tax and Economic Nexus, U.S. Sales Tax for Foreign Sellers
and Massachusetts Sales Tax. Sylvia is also a speaker and author whose articles
have been published by Bloomberg BNA and in other leading professional tax
journals and is the author of “Minding Massachusetts,” a quarterly column
published by Tax Analysts’ State Tax Notes. Sylvia is also fluent in Spanish.
For more about Sylvia visit the her firm website at www.prietodiontax.com or www.sylviadioncpa.com. You can
follow Sylvia on twitter and
on Google+ and
can contact Sylvia via e-mail at sylviadion@prietodiontax.com
*SalesTaxSupport was formerly a sales tax resource
website which closed on March 1, 2019. Many of Sylvia's posts previously
published on SalesTaxSupport have been republished here at The State and
Local Tax 'Buzz' Blog.
Comments
Post a Comment
Thanks for your comment!! Relevant comments are sincerely appreciated! However, that comments which are suspected spam, including comments which seek to sell a product or have no purpose other than to drive traffic to an unrelated site will be flagged as spam and deleted.