VAT and sales tax are both consumption taxes, paid in the end by the final customer. They trigger, calculate, and file in completely different ways. Get the distinction wrong and you create registration gaps and audit exposure.
The difference decides where you register, how you price, what you charge at checkout, and how often you file and remit.
What Is the Difference Between VAT and US Sales Tax?
VAT (Value Added Tax) is a multi-stage consumption tax collected at every link of the supply chain, with businesses reclaiming the tax paid on their inputs. US sales tax is a single-stage tax collected once, at the final retail sale. The US is the only member of the OECD (Organisation for Economic Co-operation and Development) without a VAT, per OECD Consumption Tax Trends 2024.
| Aspect | VAT | US Sales Tax |
|---|---|---|
| Where tax applies | Every stage of the supply chain | Once, at the final retail sale |
| Who bears the cost | Final consumer (business stages net out) | Final consumer |
| Who remits | Every VAT-registered business in the chain | Seller with nexus in the state |
| Input credits | Input VAT reclaimed against output VAT | No input credit; resale exemptions instead |
| Jurisdictions | National (one authority per country) | State plus thousands of local jurisdictions |
| Compliance trigger | Country revenue registration threshold | Nexus (physical or economic), per state |
| Rate structure | Standard plus reduced and zero rates | State and local rates plus product taxability |
| Digital services | Taxed by customer location, usually from the first sale | Taxable or exempt varies state by state |
What Is VAT?
VAT is a consumption tax charged on the value added at each stage of production and distribution. It is used by 175 countries and territories worldwide, per OECD Consumption Tax Trends 2024. Businesses charge VAT on sales and reclaim it on purchases, so the tax lands on final consumption by the end customer.
The design intent is that VAT falls on the end consumer. Businesses in the middle charge output VAT and reclaim input VAT, so their intermediate transactions net out to zero. The average standard VAT rate across OECD countries reached 19.3% in 2024, up from 19.1% in 2023, per OECD Consumption Tax Trends 2024. In Australia, India, Canada, New Zealand, and Singapore the same mechanism runs under a different name: GST (Goods and Services Tax).
How Does US Sales Tax Work?
US sales tax is charged once, at the final retail sale. The seller collects it from the customer at checkout and remits it to state and local authorities. There is no input credit mechanism. Businesses buying goods to resell use resale or exemption certificates so tax is not charged on intermediate transactions.
Rates and rules vary by state, county, city, and special district. The nationwide population-weighted average combined state and local rate is 7.53%, per Tax Foundation’s midyear 2026 sales tax data. Taxability also varies by product type, so groceries, clothing, and digital goods are treated differently from one state to the next.
Does the US Have a VAT?
No. The US has no federal VAT, and it is the only major OECD economy without a national VAT-type consumption tax, per OECD Consumption Tax Trends 2024. It relies on state and local sales tax instead. Proposals for a national consumption tax surface periodically but none has been enacted.
Five states levy no statewide sales tax, the NOMAD states: New Hampshire, Oregon, Montana, Alaska, and Delaware, per Tax Foundation’s midyear 2026 sales tax data. Alaska is the nuance: it has no state sales tax but permits local sales taxes, so many Alaskan sellers still collect tax at the municipal level.
How Do Input VAT and Output VAT Credits Work?
Output VAT is what you charge customers on sales. Input VAT is what you pay suppliers on purchases. Each filing period you remit the difference between the two. When input VAT exceeds output VAT, the balance becomes a refund or a credit. Valid VAT invoices are required to claim input credits.
The example below assumes a 20% VAT rate through a three-stage chain. The total collected by the government equals 20% of the final retail price. The businesses in the middle net to zero.
| Stage | Sale price | VAT charged (20%) | Input credit | Net remitted |
|---|---|---|---|---|
| Manufacturer to wholesaler | £100 | £20 | £0 | £20 |
| Wholesaler to retailer | £150 | £30 | £20 | £10 |
| Retailer to consumer | £200 | £40 | £30 | £10 |
| Total to government | £40 (20% of £200) |
How Is Sales Tax Calculated? A Worked US Example
The seller looks up the combined rate for the delivery location, charges it once at checkout, and remits on the state’s filing schedule. Arizona’s state transaction privilege tax base rate is 5.6%, and counties add local components, per the Arizona Department of Revenue tax rate tables. The table shows two counties on a $100 sale.
| Location | Combined rate | Tax on a $100 sale | Source |
|---|---|---|---|
| Arizona state base | 5.6% | — | Arizona Department of Revenue |
| Coconino County (minimum combined) | 6.9% | $6.90 | Arizona Department of Revenue |
| Santa Cruz County (minimum combined) | 6.6% | $6.60 | Arizona Department of Revenue |
There is one tax event, at the final sale. The buyer sees the tax at checkout. Businesses earlier in the chain use resale exemptions instead of charging tax at every stage. You can check a live rate with Commenda’s sales tax calculator.
When Do You Have to Register for VAT? Registration Thresholds
VAT registration is usually triggered when you cross a country-level revenue threshold. Thresholds vary by country and by whether you are established there. Non-EU sellers of B2C (business-to-consumer) digital services face an effective zero threshold and register from the first sale, a trap that catches many US companies.
| Threshold | Value | Source |
|---|---|---|
| UK VAT registration | £90,000 rolling 12-month turnover, from 1 April 2024 (raised from £85,000) | HMRC policy paper |
| UK VAT deregistration | £88,000 | HMRC policy paper |
| EU distance selling (intra-EU B2C) | €10,000 EU-wide annual, net of VAT | European Commission One Stop Shop |
| Non-EU B2C digital services | €0 effective (register from the first sale) | European Commission One Stop Shop |
HMRC is His Majesty’s Revenue and Customs, the UK tax authority. The EU is the European Union.
What Is Sales Tax Nexus? Physical vs Economic
Nexus is the connection to a state that obligates you to collect its sales tax. It comes in two forms. Physical nexus is an office, employees, or inventory in the state, including stock held in an FBA (Fulfillment by Amazon) warehouse. Economic nexus is revenue or transaction volume alone. Registration is state by state, unlike per-country VAT registration.
What Did the Wayfair Decision Change?
South Dakota v. Wayfair (2018) overturned the 1992 Quill physical-presence rule and let states impose economic nexus on remote sellers. South Dakota’s model of $100,000 in sales or 200 transactions spread to most states. Many states have since dropped the 200-transaction prong, leaving a revenue-only test.
Current per-state thresholds move often. Commenda’s US nexus exposure guide tracks the live figure for every state as the canonical source.
Why Is VAT Centralized and Sales Tax Decentralized?
VAT is administered by one national authority per country, with EU-level harmonization but country-level rates and rules. US sales tax is governed by states plus thousands of county, city, and special-district jurisdictions. That governance gap is the reason compliance feels different in each system.
One VAT registration covers a whole country. A single US state can carry widely varying combined rates by location, as the Arizona counties above show. So US compliance is a rate, rules, and filing problem at once, not just a rate lookup. EU member states may not set a standard VAT rate below 15%, per Article 97 of the EU VAT Directive (Council Directive 2006/112/EC), with rates ranging up to Hungary’s 27% top rate, per Tax Foundation’s VAT Rates in Europe.
What Are Marketplace Facilitator Laws?
Marketplace facilitator laws shift the obligation to collect and remit sales tax from the individual seller to the marketplace for sales it facilitates. Amazon, Etsy, and eBay collect and remit on the seller’s behalf. Every US state with a sales tax now has such a law.
The VAT world has a parallel. EU and UK deemed-supplier rules make marketplaces liable for VAT on certain cross-border B2C sales. One caveat matters for US sellers: marketplace sales can still count toward your own economic nexus thresholds in some states, so facilitated sales do not always remove your exposure.
How Are Digital Goods and SaaS Taxed: VAT vs Sales Tax?
VAT countries tax B2C digital services based on the customer’s location under place-of-supply rules, usually from the first sale. US states each decide whether SaaS (Software as a Service), downloads, and streaming are taxable at all. A US software company can owe VAT abroad and sales tax at home at the same time.
How Does VAT Apply to Digital Services?
For B2C digital sales, you charge the VAT rate of the customer’s country. A German consumer pays Germany’s 19% standard rate, per Tax Foundation’s VAT Rates in Europe. For B2B (business-to-business) sales to a customer with a valid VAT number, the reverse charge applies, so the seller charges no VAT and the customer self-accounts for it.
Is SaaS Taxable Under US Sales Tax?
It depends entirely on the state. Some states tax SaaS, downloads, and streaming, while others exempt them or apply narrow definitions. Because there is no federal rule, you check taxability state by state. Commenda’s state-by-state guide to sales tax on digital goods breaks down the current treatment.
Do US Companies Need to Register for VAT?
Yes, in many cases. A US company must register for VAT if it sells B2C into a VAT country above the local threshold, or from the first B2C digital sale into the EU. Pure B2B sales are usually handled by the customer under the reverse charge, so no seller registration is required for B2B in most cases.
How Do You Charge VAT When Selling to EU Customers?
Identify whether each sale is B2B or B2C. For B2B, apply the reverse charge against a valid customer VAT number. For B2C, register through the OSS (One Stop Shop) non-Union scheme for non-EU sellers, or IOSS (Import One Stop Shop) for low-value goods, then charge the customer’s country rate.
The European Commission One Stop Shop lets you register once and file a single return for B2C sales across all EU member states, cutting cross-border VAT red tape by up to 95% versus registering in each country. IOSS covers imported goods in consignments up to €150. Charge the destination-country rate, issue compliant VAT invoices, and keep records.
Which Tax Should Your Business Care About? A Quick Checklist
Sellers into VAT countries need VAT planning. Multi-state US sellers need nexus monitoring. Scaling companies usually need both, because the two systems run on separate triggers, rates, and filing calendars.
You likely need VAT planning if:
- You sell B2C into VAT countries such as the EU, the UK, or other VAT jurisdictions.
- You provide digital services to consumers abroad under place-of-supply rules.
- You need OSS, IOSS, or local VAT registrations.
You likely need US sales tax planning if:
- You sell into multiple US states.
- You hold inventory or employ people in certain states.
- You cross economic nexus thresholds after Wayfair.
What Records Do You Need for VAT and Sales Tax Audits?
VAT audits are invoice-driven. US sales tax audits center on exemption certificates. The document that protects you differs by system, so the record-keeping discipline differs too.
What Do VAT Audits Check?
VAT audits verify invoices. Valid invoices substantiate the output VAT you charged and the input credits you claimed. A missing or invalid invoice voids the credit, because the whole credit mechanism depends on documentation. Keep complete, valid VAT invoices for every transaction on both sides.
What Do US Sales Tax Audits Check?
US sales tax audits center on exemption certificates. Auditors check whether you charged tax correctly and whether exempt sales carried a valid, current certificate. A missing or expired certificate turns an exempt sale into a taxable assessment, so the tax you never collected becomes a bill you owe.
How Commenda Helps With VAT and Sales Tax Compliance
VAT is invoice-driven and multi-stage, with input credits netting through the chain. US sales tax is nexus-driven and multi-jurisdictional, with location rules and exemption management. Growing companies usually face both at once.
Commenda’s global indirect tax software tracks your physical and economic nexus across states, monitors VAT registration thresholds across countries, and automates registrations and filings on one dashboard. Use the US nexus exposure guide for current threshold claims and the sales tax calculator for rate lookups.
Book a demo call to get a free assessment of your VAT and nexus exposure.
