Sales Tax vs VAT: Key Differences Explained

Sales Tax (US): • Single-stage tax — applied only at final sale to consumer • Rates vary by state, county, and city (0% to 10.25%) • Only ~45 states have sales tax • No input tax credit mechanism • Primarily on physical goods

VAT (EU): • Multi-stage tax — applied at each stage of production • Input VAT is deductible at each stage • Rates set at national level (17% to 27%) • All EU countries have VAT • Covers goods AND most services

For international businesses: • Selling US→EU: you may need to charge EU VAT (no US sales tax applies) • Selling EU→US: no VAT charged; US sales tax may apply if you have nexus • The input VAT deduction in EU means VAT is effectively neutral for businesses • US sales tax cascades (tax on tax) since there's no input credit

After the 2018 South Dakota v. Wayfair decision, US states can require remote sellers to collect sales tax based on economic nexus (typically $100K in sales or 200 transactions).

This means EU businesses selling to US consumers may have sales tax collection obligations in multiple states.