Tax is a government levy added to the cost of goods, services, and transactions to generate revenue. Every country has unique and specific rules that govern its taxes. For retailers looking to sell multiple products to multiple countries, the details can quickly get confusing.
To get a better understanding of the different types of import taxes, this guide will decode the following:
The taxes discussed in this guide are all forms of indirect tax. Unlike a direct tax, which is a tax that is paid directly to the government (income tax), indirect tax is collected throughout the supply chain and remitted to the government but is usually included as part of the purchase price of a good or service. Two types of indirect taxes are referred to as consumption taxes. Indirect and consumption taxes are calculated using a standard percentage that the import country's government determines. Depending on the country, the two kinds of consumption taxes may be referred to as value-added tax (VAT) or goods and services tax (GST).
VAT: Most countries use VAT as their main form of taxation. VAT rates, rules, and exceptions are determined at the individual country level. VAT is paid at every stage of a good's production, distribution, and consumption. VAT is charged at every point of sale at which value has been added; from the sale of the raw materials to the final purchase by a consumer. While VAT is collected at each point of sale, a portion of the VAT goes to reimburse the VAT paid by the previous buyer in the chain. Ultimately, the consumer pays the VAT as the last transaction, and the government gets a portion of the VAT from every stage.
GST: Goods and services tax (GST) is another term for VAT in some countries. GST is essentially the same as VAT.
Another kind of indirect tax is the United States (U.S.) sales tax. The U.S. is one of the few countries that does not charge VAT or GST. Instead, the U.S. uses state sales tax as its method of taxation. However, there are several criteria that need to be met in order for the sales tax representative to be able to collect sales tax. While VAT is paid multiple times on a product (at each level of production, distribution, and consumption), sales tax is only charged on the sale of goods to the consumer.
U.S. state sales tax: Sales tax is a one-time tax charged at the point of purchase. The consumer pays sales tax to the retailer, and the retailer then remits it to the government. The end consumer is the only one who pays sales tax. If a manufacturer or retailer purchases something for resale, they are not responsible for paying sales tax on their purchases. Sales tax rates, rules, and exceptions are determined at the local and state level. Retailers don’t have to collect or remit sales tax when selling online from state to state in the U.S. unless they have a business presence in the state (nexus) which is created by having a physical presence (buildings, employees, or salesperson visits) or an economic presence (selling above thresholds determined by each state). Retailers must have a business presence (nexus) in order to collect and remit sales tax in a state where the buyer is located, or they must sell above a certain value within the state where the buyer is located.
U.S. import sales tax: The U.S. does not have a national sales tax applicable to imports. International (and domestic) sellers are only required to collect and remit sales tax when they have nexus in the state they are selling to.
As established above, VAT/GST and sales tax are all forms of indirect tax, meaning that the end consumer pays the tax. Another similarity is that governments impose these taxes to generate revenue. But how do they compare when it comes to cross-border transactions?
|Sales tax||VAT/GST tax|
|Who is responsible for paying the tax?||- The final consumer is the only one that pays sales tax, paid to the retailer|
|- Cross-border transactions may be exempt if you do not have a nexus relationship with the consumer's tax jurisdiction||- Tax is paid at every stage of the product life, from production to sale, where there is an increase.|
| When is the tax collected from consumer? | - The tax is collected at the time of sale from the end consumer | - The tax is collected at every stage of production, distribution, and consumption | | Invoicing | - Sales tax is calculated based on the products or services listed on the invoice
Invoice timing typically isn’t legislated since there is no need to reclaim the taxes. It is typically issued at the point of sale, but can be part of the transaction negotiation process
Businesses should keep invoices from business-to-business (B2B) and business-to-consumer (B2C) transactions for seven years
Consumers generally don’t need to keep invoices/receipts (exceptions exist, but are rare) | - Usually inclusive (tax amount is included in the total price of purchase)
A VAT invoice must be issued within 15 days prior to the end of the month in which the goods or services were supplied
Failure to do so could result in illegally charging late fees | | Reporting and remitting | - Typically self-reported by the business each period (monthly, quarterly, yearly)
Generally, the higher your sales volume is in a state, the more often you are required to report | - Depending on the country, VAT and GST are typically reported with the help of a tax authorityFor countries with low-value tax schemes, such as the UK, EU, Australia, etc.:- Cross-border VAT is usually collected by customs unless it is a low-value shipment
International low-value taxes (ILVT) are self-reported | | Can recipient businesses reclaim taxes? | - Not applicable domestically in the U.S. because business-to-business transactions for resale items are tax-free | - At each level of payment and VAT charge, a portion of the VAT reimburses the VAT that the previous buyer in the chain paid
Reclaimable VAT expenses from tax authorities varies from country to country
Reclaiming taxes is not available for the end consumer | | Oversight/Auditing | - U.S. audits procedures are conducted by state Departments of Revenue
Audits are run by local governments in addition to the state Departments of Revenue in certain states | - Audits are conducted by the territory's government, and procedures are similar to sales tax
Because VAT/GST can be reclaimed, businesses audit each other and compliance improves | | Taxes collected on cross-border, imported goods | - Sales tax is never collected by customs, if sales taxes were due, the sellers typically remit them directly to the applicable states
Sales tax must be self-reported and remitted
Imports to the U.S. from an international seller will not be charged sales tax in most instances; sales tax will have to be remitted only if:
A business outside of the U.S. sells above the threshold in any state (thresholds and rules vary by state)
The business has a presence within the state of the imports (nexus)
New laws are shifting responsibility to sellers/ businesses to collect VAT
GST/VAT are self-reported domestically
Cross-border GST/VAT are typically collected by customs |
See the flow of how VAT and GST are incurred from manufacturing to the final sale in the examples below.
A United Kingdom (UK) bike manufacturer buys bike parts for £50 and incurs a VAT charge of 20% (£10). The bike manufacturer sells the bike to a bike retailer for £100 and incurs a 20% VAT charge (£20). Accordingly, the manufacturer's output tax is £20 and their input tax is £10, so the manufacturer will pay the difference of £10 to Her Majesty's Revenue and Customs (HMRC, the official tax authorities in the UK) and reclaim £10 as reimbursement for the VAT paid when they bought the parts.
The retailer then sells the bike to a consumer for £120 and collects a 20% VAT (£24). The retailer's output tax is £24 and the input tax is £20. Therefore, the retailer will pay £4 to HMRC and reclaim £20 as reimbursement for the VAT they paid while purchasing the bike from the manufacturer. At every point of purchase, a portion of the tax is remitted to HMRC while the other portion reimburses the seller. The end consumer is the only one who does not get reimbursed.
A U.S. bike retailer in San Diego, California, is selling a bike for 100 USD. There is a consumer in Napa, California, who is interested in purchasing the bike and having it shipped to her. The retailer will charge sales tax on the 100 USD bike based on the customer's location. For this example, Napa's sales tax rate is 7.75%. The consumer is charged 107.75 USD, which is paid to the retailer. The retailer then remits the 7.75 USD sales tax to the Californian government.
The price of shipping was not included for the example above. Generally, tax is not charged on shipping.
If a Californian bike retailer sells a bike for 100 USD to a consumer outside of California, then it's likely that sales tax will not be charged. Sales taxes are typically collected from another state only if the retailer has a presence in the location of the buyer. This presence could be a brick-and-mortar store, a warehouse, an office, etc. Some businesses that sell above a certain threshold are required to collect sales tax and, therefore, have acquired a nexus presence. Regardless, the retailer, whether within the U.S. or international, would have to have a "sales tax nexus" in the territory of the consumer in order to charge them sales tax.
France was the first country to implement VAT in 1954. Since then, more than 160 countries followed that example and applied some kind of indirect tax—either GST or VAT. Sales tax was first enacted in West Virginia in 1921. There are several reasons why the U.S. is one of the few countries that does not use VAT or GST:
While VAT, GST, and sales tax are all different methods of taxation, they essentially fulfill the same purpose. Whether a country taxes at a set rate, a percentage based on added value, at the time of consumption, at the time of production and distribution, at the time of sale, or time of import, all these forms of taxation serve the purpose of collecting government revenue.