Difference Between VAT and Sales Tax: What You Need to Know

The difference between VAT and sales tax is a common source of confusion, especially for global businesses navigating tax rules across different countries. While both are types of indirect tax (collected by the seller and passed on to the government), the way they’re applied is fundamentally different.

Let’s dive into the key differences between VAT and sales tax, so you can clearly understand which system applies to your business, and what it means for your bottom line.

What Is VAT?

VAT, or Value Added Tax, is a type of indirect tax that’s charged on the value added at each stage of production or distribution of goods and services.

Here’s how it works in simple terms:

• When a business buys raw materials, it pays VAT on those materials.

• When it sells the finished product, it charges VAT to the customer.

• The business can then deduct the VAT it paid on inputs from the VAT it collected on sales, and pay the difference to the government.

So, it’s not just a tax at the final sale— it’s applied throughout the supply chain, but the end consumer bears the full cost, since businesses get to reclaim what they paid.

Example:

Let’s say you buy a table for $100 and the VAT rate is 10%.

• The store charges you $110 (that’s $100 + $10 VAT).

• The $10 goes to the government.

VAT is used in many countries around the world, especially in Europe.

The US doesn’t use VAT, but it relies on sales tax instead, which is applied only at the point of final sale.

What Is Sales Tax?

Sales tax is a consumption tax that’s added at the point of sale when a customer purchases goods or certain services. Unlike VAT, which is charged at multiple stages in the supply chain, sales tax is only applied once, when the final consumer makes a purchase.

How It Works:

Let’s say you buy a shirt for $50 and the sales tax rate is 8%.

• You’ll pay $54 total ($50 for the shirt + $4 in sales tax).

• The seller collects that $4 and sends it to the government.

Not all goods and services are taxed. Some essential items like groceries or prescription medications are often exempt or taxed at a lower rate.

Key Differences Between VAT and Sales Tax

Here are the key differences between VAT and sales tax:

Pros and Cons: VAT vs. Sales Tax

If you’re running a business or expanding into international markets, understanding the pros and cons of VAT vs. Sales Tax can help you plan better, price smarter, and stay compliant. 

Here’s how they compare at a glance:

VAT | Pros:

• Helps prevent tax evasion by tracking tax at each stage of the supply chain

• Provides steady revenue for governments

• Encourages better bookkeeping and transparency in businesses

• Businesses can claim input tax credits, reducing overall tax burden

VAT | Cons

• More complex to administer, especially for small businesses

• Can increase prices for consumers if not managed well

• Requires regular VAT filings and documentation

• May need additional software or accounting support

Sales Tax | Pros

• Simple to understand and administer—only charged at the final sale

• Easier compliance for small and medium businesses

• No need to track taxes at every supply chain stage

• Businesses don’t have to manage input/output tax credits

Sales Tax | Cons

• More prone to tax evasion if sellers don’t report properly

• Can be confusing due to varying state, county, and city rates (especially in the US)

• Doesn’t capture revenue from earlier stages of the supply chain

• May create unfair tax pressure on final consumers, especially in lower-income brackets

How Different Countries Apply VAT and Sales Tax

Here’s how some major countries approach VAT and sales tax:

United States (Sales Tax)

The United States does not have a national VAT system. Instead, it relies on sales tax, which is applied at the state and local levels. This means sales tax rates can vary dramatically depending on where the transaction takes place. 

Some states like Oregon and Delaware have no sales tax at all, while others like Tennessee or Louisiana have combined state and local rates exceeding 10%. Sales tax is only applied to the final sale to the consumer. 

Businesses that purchase goods for resale are typically exempt, provided they present a valid resale certificate. Compliance in the U.S. can be tricky for online sellers, especially with economic nexus laws that require sales tax collection even if a business doesn’t have a physical presence in a state.

United Kingdom (VAT)

The UK uses a standard Value Added Tax (VAT) system. The current standard rate is 20%, though some goods and services fall under reduced rates (like 5%) or are exempt entirely, such as most food items and children’s clothing. 

VAT is collected at each stage of the supply chain, and businesses registered for VAT can reclaim input VAT paid on their expenses. It’s a structured and well-established system, with regular VAT filings required from businesses depending on their turnover.

Canada (GST/HST)

Canada applies a federal Goods and Services Tax (GST) at 5%, but many provinces have merged their own sales taxes with GST to form the Harmonized Sales Tax (HST), which ranges from 13% to 15% depending on the province. 

For example, Ontario applies a 13% HST, while provinces like Alberta stick to the federal 5% GST. Like VAT, Canadian businesses can claim input tax credits on the GST/HST they pay on business expenses, making the system somewhat similar to VAT in terms of mechanics, even though it’s branded differently.

European Union (VAT)

All member countries in the European Union follow a VAT model, though individual rates and exemptions vary. The EU mandates a minimum standard VAT rate of 15%, but most countries opt for rates between 20% and 25%. 

Cross-border transactions within the EU require special attention, especially for businesses selling goods or services in multiple EU countries. 

Often, companies must register for VAT in multiple jurisdictions and adhere to the EU VAT Directive, which governs how VAT is applied across member states. 

For digital products, the VAT is charged based on the customer’s location, not the seller’s, adding another layer of complexity.

Australia (GST)

Australia uses a Goods and Services Tax (GST), which operates similarly to VAT. The GST is applied at a flat 10% rate to most goods and services sold in the country. 

Businesses registered for GST are required to collect it on taxable sales and can claim credits for GST paid on business-related purchases. 

The tax is levied at each stage of production and distribution, and the final consumer bears the full cost. Australia’s GST system is relatively straightforward and centrally administered by the Australian Taxation Office (ATO).

India (GST)

India’s Goods and Services Tax (GST), introduced in 2017, replaced a complex mix of central, state, and local taxes. It is structured like a multi-stage VAT system and is applied at every point of the supply chain. 

Depending on the type of goods or services, the tax rates range from 0% to 28%. Businesses can claim input tax credits, but the filing and compliance process in India can be detailed and time-consuming, especially for smaller businesses. 

Despite the initial implementation challenges, India’s GST has helped unify the tax structure across states and simplified interstate trade.

Read More: Which 5 States in the US Don’t Have Sales Tax in 2025?

Which Tax System Is Better for Your Business?

Choosing between VAT and sales tax largely depends on where your business operates, who your customers are, and how your supply chain is structured.

That said, each system has pros and cons that can directly impact your pricing, margins, and compliance workload. You can refer to the above sections.

If you’re selling in Europe, Canada, or most parts of Asia, you’re likely operating under a VAT or GST system, and there’s little choice but to comply. These systems are structured to allow businesses to reclaim tax on business-related purchases, which can help reduce your overall tax burden. 

However, they do require careful tracking of input and output VAT, and the paperwork can be more intensive, especially if you’re operating in multiple countries.

On the other hand, if you’re based in the United States, you’ll be dealing with sales tax, which is simpler in theory but complex in execution due to state-by-state variations. 

For small businesses and startups, sales tax can be easier to manage at first, since it’s only applied at the point of final sale. But as you grow and sell across state lines (especially online), compliance gets tricky due to economic nexus rules and differing local tax rates.

So, which is better?

If you prefer simplicity at the point of sale, and your business model is relatively local or small-scale, sales tax might feel more manageable. But if you’re part of a multi-stage supply chain, or your business spends significantly on goods and services, VAT could be more efficient, thanks to the input tax credit mechanism.

In the end, the “better” system is the one you’re best prepared to manage, both legally and operationally. 

Working with a tax professional from doola, especially if you sell internationally can make all the difference in choosing the right structure and staying compliant.

How doola Can Help With Sales Tax & Reseller Certificates

We help founders navigate sales tax registration, collect and manage reseller certificates, and meet compliance obligations, even if you’re just getting started or expanding into new states. 

Our expert team ensures you’re registered where you need to be, avoiding costly penalties and saving you from administrative overload.

Whether you’re selling physical products, running a dropshipping business, or managing a multi-state e-commerce operation, doola gives you the support to manage sales tax the right way.

Book a free consultation with our experts and start your business with confidence.

FAQs

Why do some countries use VAT while others use Sales Tax?

It comes down to each country’s tax policy and administrative system. VAT is more common globally because it’s collected at multiple stages and considered harder to evade. Sales tax, mostly used in the U.S., is simpler to apply at the final point of sale.

How do VAT and Sales Tax impact e-commerce businesses?

VAT requires businesses to register, collect, and remit tax in each country where they sell, often with complex cross-border rules.

Sales tax in the U.S. varies by state, and online sellers must track where they have “nexus” and collect tax accordingly.

Can businesses reclaim VAT, and how does that differ from Sales Tax exemptions?

Yes, businesses can reclaim VAT paid on business expenses through input tax credits. With sales tax, businesses typically use resale certificates to avoid paying tax on goods they plan to resell—there’s no reimbursement system like VAT.

What should I consider when choosing between VAT and Sales Tax for my business?

Consider where your customers are, the complexity of your supply chain, your compliance capacity, and where you’re legally required to register. If you operate globally, you’ll likely need to handle both systems.