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What is the difference between sales tax and VAT?

nostrademons 5y ago
VAT applies at a flat rate at all levels within the supply chain, sales tax is only collected from the consumer with the final sale. Under a 5% sales tax, the consumer pays $50 on a $1000 iPhone when they buy it at retail. Under a 5% VAT, Apple pays 5% of its profits (not revenue), then whoever makes the lithium-ion batteries pays 5% of its profits, then whoever mines the lithium pays 5% of its profits, and on down the value chain. Among other economic effects, VATs do not incentivize vertical integration. With a traditional sales tax, corporations can avoid paying the tax by bringing all the suppliers in-house so that there's no transaction to tax. With a VAT, it's all the same: either you pay the tax or you pay the supplier and the supplier pays the tax.
- Gwypaas 5y ago
  That is not correct. VAT is added in the supply chain as a flat rate on price, then you keep an account of in-going and out-going. Then the state makes up the difference in the end of the fiscal year depending on if your customers were other businesses or consumers. This is precisely to prevent your easily spotted mistake of promoting vertically integrated companies.
- tonyedgecombe 5y ago
  VAT doesn’t accumulate like that. If my business pays VAT on some goods it gets to claim that back at the end of the quarter. For most business it’s neutral (apart from the paperwork).
  - the-dude 5y ago
    > For most business it’s neutral (apart from the paperwork). Ehhh, I guess it is neutral if your expenses are the same as your revenue. That is no profit. VAT is calculcated on 'the value you add'. What you owe is that amount minus the VAT paid on your expenses.
    - tonyedgecombe 5y ago
      It's neutral up the chain, so if my supplier charges 20% vat then I charge 20% vat it doesn't result in the consumer paying 44% vat.
- bildung 5y ago
  Companies don't pay VAT, it is a consumer-only tax. In countries having VAT, companies always treat VAT as an item-in-transit in their books. In your Apple example, the consumer pays the $1000 plus the 5% VAT to Apple, and Apple sends the 5% VAT to the IRS. If Apple bought components for that phone that included VAT, the supplier providing the components sends that VAT to the IRS, and Apple can claim that VAT from the IRS.
- sokoloff 5y ago
  > Under a 5% VAT, Apple pays 5% of its profits (not revenue) Apple pays 5% on the value it added, not on its profits on the phone. If they buy $500 in components from upstream suppliers and sell the phone for $1000, they’ve added $500 of value (on which they’ll remit VAT), but not achieved $500 of profits on that phone. (They have labor and other overhead.)
tobias3 5y ago
There is no difference in outcome. VAT is paid on every stage on inputs by companies BUT they claim it back and if the input comes from a different country they don't pay VAT in the first place. The only one not being able to claim it back is the consume, like a sales tax. It makes detecting fraud easier since you can see a companies input vs output vs profit.

VAT applies at a flat rate at all levels within the supply chain, sales tax is only collected from the consumer with the final sale. Under a 5% sales tax, the consumer pays $50 on a $1000 iPhone when they buy it at retail. Under a 5% VAT, Apple pays 5% of its profits (not revenue), then whoever makes the lithium-ion batteries pays 5% of its profits, then whoever mines the lithium pays 5% of its profits, and on down the value chain. Among other economic effects, VATs do not incentivize vertical integration. With a traditional sales tax, corporations can avoid paying the tax by bringing all the suppliers in-house so that there's no transaction to tax. With a VAT, it's all the same: either you pay the tax or you pay the supplier and the supplier pays the tax.

Gwypaas 5y ago
That is not correct. VAT is added in the supply chain as a flat rate on price, then you keep an account of in-going and out-going. Then the state makes up the difference in the end of the fiscal year depending on if your customers were other businesses or consumers. This is precisely to prevent your easily spotted mistake of promoting vertically integrated companies.
tonyedgecombe 5y ago
VAT doesn’t accumulate like that. If my business pays VAT on some goods it gets to claim that back at the end of the quarter. For most business it’s neutral (apart from the paperwork).
- the-dude 5y ago
  > For most business it’s neutral (apart from the paperwork). Ehhh, I guess it is neutral if your expenses are the same as your revenue. That is no profit. VAT is calculcated on 'the value you add'. What you owe is that amount minus the VAT paid on your expenses.
  - tonyedgecombe 5y ago
    It's neutral up the chain, so if my supplier charges 20% vat then I charge 20% vat it doesn't result in the consumer paying 44% vat.
bildung 5y ago
Companies don't pay VAT, it is a consumer-only tax. In countries having VAT, companies always treat VAT as an item-in-transit in their books. In your Apple example, the consumer pays the $1000 plus the 5% VAT to Apple, and Apple sends the 5% VAT to the IRS. If Apple bought components for that phone that included VAT, the supplier providing the components sends that VAT to the IRS, and Apple can claim that VAT from the IRS.
sokoloff 5y ago
> Under a 5% VAT, Apple pays 5% of its profits (not revenue) Apple pays 5% on the value it added, not on its profits on the phone. If they buy $500 in components from upstream suppliers and sell the phone for $1000, they’ve added $500 of value (on which they’ll remit VAT), but not achieved $500 of profits on that phone. (They have labor and other overhead.)

tobias3 5y ago

There is no difference in outcome. VAT is paid on every stage on inputs by companies BUT they claim it back and if the input comes from a different country they don't pay VAT in the first place. The only one not being able to claim it back is the consume, like a sales tax. It makes detecting fraud easier since you can see a companies input vs output vs profit.