VAT vs Sales Tax

Value Added Tax (VAT) is a consumption tax applied at every stage of production and distribution, based on the value added at that stage. Rather than being charged once at checkout, VAT moves through the supply chain — from manufacturer to wholesaler to retailer — with each registered business charging VAT on what it sells and reclaiming VAT on what it buys.

More than 170 countries use VAT or a closely related tax such as GST. For a deeper walkthrough of how the mechanism works, see our How VAT Works guide, or try the VAT Calculator for instant figures.

Sales tax is a consumption tax charged once, at the final point of sale to the end consumer. Unlike VAT, it is not collected at each stage of a supply chain — wholesale and business-to-business purchases are typically exempt when the buyer provides a valid resale certificate, so the tax only applies when a product reaches its final buyer.

Sales tax is most closely associated with the United States, where it is set at the state and local level rather than nationally, leading to significant variation in rates and rules across jurisdictions.

Each business in a VAT supply chain charges VAT on its sales (output VAT) and pays VAT on its own purchases (input VAT). Periodically — usually quarterly — the business files a return and pays the tax authority the difference between the two. Because each stage only pays tax on the value it added, the system avoids taxing the same value twice.

This incremental structure means VAT revenue is collected gradually across the supply chain rather than all at once. See our How VAT Works guide for a full breakdown of the filing process and formulas.

A retailer selling to an end consumer adds sales tax to the sale price at checkout and remits the collected tax to the relevant state or local tax authority, typically on a monthly or quarterly filing schedule. Businesses purchasing goods for resale generally present a resale certificate to avoid paying tax on inventory they intend to sell on — the tax is deferred until the item reaches its final buyer.

Because there is no reclaim step for intermediate purchases, sales tax administration is comparatively simple, but it also means the entire tax burden is concentrated at a single transaction rather than spread across the supply chain.

Input tax credits are what make VAT a "value added" tax rather than a tax on the full price at every stage. When a business pays VAT on its own purchases (input VAT), it can generally reclaim that amount from the tax authority, offsetting it against the VAT it charged on its own sales (output VAT).

This is the central mechanical difference from sales tax, which has no equivalent credit system — sales tax exemptions rely on resale certificates issued before the sale, rather than a reclaim process after the fact. VAT Due = Output VAT − Input VAT for each filing period.