VAT/GST
Unlocking the secrets of sales Tax: IBFD's expert analysis
Whether you're an individual or a business, we've got you covered with valuable insights and practical information to understand the intricacies of indirect tax systems essential in today's complex tax landscape.
Indirect tax system in the United States
Indirect taxes are those imposed on certain transactions, goods or events. Examples include value added tax (VAT), goods and services tax (GST), sales tax, services tax, and consumption tax among others.
The United States is one of the few countries in the world without a VAT/GST tax system. There's also no national sales tax. However, 45 states and Washington D.C. have some form of sales tax (the five states that don't impose a state sales tax are: Alaska (although a local sales tax is permitted), Delaware, Montana, New Hampshire and Oregon). State and local sales taxes are generally flat tax systems with one rate applying to the value of a transaction.
VAT
A turnover tax levied at each stage of the production and distribution process. In its purest form, VAT is a tax on the final consumption of goods and services. Vat is a percentage of the price each supplier charges to their customer.
GST
Similar to VAT, GST is a turnover tax levied at various stages of manufacture, sale, and consumption of goods and services. GST applies when goods are services are supplied.
Sales Tax
A turnover tax imposes as a percentage of gross receipts (i.e. as an ad valorem tax, or as an amount per unit of product). Sales tax is generally paid by the buyer, but the seller is responsible for collecting and remitting the tax to the appropriate authorities.
Dual federalism
The United States has a dual federal system of governance. This means the federal government and state governments each have clearly defined legal powers. The federal government cannot interfere with powers delegated to the states, and states cannot interfere with, or exercise authority over, matters delegated to the federal government.
Therefore, each state has autonomy in tax matters, provided their laws that don't violate the US Constitution. The federal government generally has no say over the rate and tax base of the retail sales tax to be applied at the state and local levels. However, the federal government has the power to oversee commerce between states (interstate transactions) to avoid conflicts. So, there's nothing that prohibits the federal government from imposing a national sales tax, or even a VAT system (but not a provincial sales tax, which is within the authority of the states).
A federal VAT system for the United States?
Several politicians have voiced support for a federal VAT system over the years. Notably, when businessman Andrew Yang ran for US President in 2020, his platform included a VAT proposal. However, instituting a federal VAT system would require a high level of agreement and coordination within the US Congress, as well as within the Executive branch overseen by the US President, which was not the political landscape of the time.
What is the tax system in the United States?
The United States is among a minority of countries where local jurisdictions implement sales taxes on goods and services sold to consumers. Sales taxes also apply to business-to-business transactions.
But what is a sales tax? Simply put, it's a tax that applies within a state, imposed on the sale, transfer, or exchange of goods and specific services. This tax is a percentage of the price of the goods or services, added to the sales amount and paid by the purchaser. While the buyer bears the cost, the seller is responsible for collecting and remitting it to the tax authorities.
In some cases, customers can be held liable for a compensating use tax where the purchase of goods takes place out-of-state from a retailer who lacks sufficient nexus (or activity) in a state to require the collection of the sales tax, but the buyer intends to use, store or distribute the goods within the state. A state's use tax rate is generally the same of the sales tax rate.
States generally categorize sales taxes into two categories: (1) Seller Privilege Tax, or (2) Consumer Tax, based on who is primarily liable for paying the tax:
- in Seller Privilege Tax States, the tax is imposed on the retailer;
- in Consumer Tax States, the tax is imposed on the customer, but the collection obligation is imposed on the retailer.
Navigating obligations
Understanding the complexities of the sales tax system and associated obligations is crucial. The most important aspect to consider is the nexus as it defines the level of connection between a taxing jurisdiction (e.g. a state) and an entity (e.g. a business) and the requirement to collect the sales tax. Without this connection, the jurisdiction cannot enforce sales taxes.
Generally, any form of physical presence or property in a state generates a high chance of creating nexus to the state and local jurisdictions. Additionally, out-of-state retailers meeting certain sales thresholds within the state may create an economic nexus to the state. This authority to require retailers with physical or economic nexus to collect sales and use taxes is primarily reserved to the states by the US Constitution. Typically, the party collecting sales tax must remit it to the taxing jurisdiction. The responsibility lies with the retailer or service provider, forwarding the tax to the corresponding state's Department of Revenue.
Unlike some systems, the United States does not use a reverse charge method, and there's usually no requirement for sales tax withholding. Notice and reporting requirements mandate retailers informing buyers about their obligation to pay and report state use tax on purchases. Retailers may also need to provide purchasers and the state's Department of Revenue with an annual statement of transactions.
Compliance with sales tax obligations is vital for businesses, and our experts offer guidance and resources on the Tax Research Platform to help meet these requirements effectively.
IBFD's expertise and resources
Our extensive expertise and resources are dedicated to helping you navigate the challenges and reap the benefits of sales tax, but also in VAT and/or GST systems. With our deep understanding of taxation, we proudly serve as your go-to resource for all things related to your tax matters. Our expert team has curated a comprehensive collection of articles, guides, and practical tools to navigate the intricate world of indirect taxation. We stay updated with the latest tax laws and regulations, providing you with accurate and timely information. By leveraging our expertise and resources, you can confidently navigate the complexities of sales tax, ensuring compliance.
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Resources
For a Comprehensive Guide to Value Added Tax For Suppliers of Goods & Services see: VAT Explained.
For a full list of state and local sales and use tax rates, see the United States - Corporate Taxation - Country Analyses section 13.7.1. Tax rates on the Tax Research Platform.
For a full list of economic nexus thresholds, see the United States Corporate Taxation - Country Analyses section 13.7.2. Wayfair thresholds for economic nexus on the Tax Research Platform.