The world of consumption taxes can be confusing, especially when comparing the tax system in the U.S. to the systems used in other countries. For U.S. shoppers and businesses, it’s important to know the difference between the sales tax that Americans are used to and the Goods and Services Tax (GST), which is common globally. Both are taxes on purchases, but they work in very different ways, affecting how they are collected and their final cost.
The Basic Difference
Both sales tax and GST are indirect taxes, meaning they are charged on transactions (purchases) instead of income, and the cost is ultimately paid by the person who buys the final product. The difference is how they are collected and applied.
What is Sales Tax?
Sales tax is the main type of consumption tax in the United States. It is a one-time tax charged only at the very end when the product is sold to the final customer.
- Who Collects It: State and local governments charge this tax (not the federal government). The store or retailer collects the tax from you and sends it to the government.
- How It Works: It’s an “extra charge” tax. When you pay for something, the sales tax is calculated as a percentage of the price and simply added to your total bill at the register.
- Preventing Double-Taxation: U.S. sales tax is designed to avoid taxing the same item multiple times as it moves through the supply chain (known as “tax pyramiding“). It does this by offering an exemption for most business-to-business (B2B) sales. Businesses use a special resale certificate so they aren’t taxed on materials they plan to resell or use to make a new product. Only the final sale to a consumer is taxed.
- Variation: Rules and rates are extremely varied. There is no national sales tax. Rates change a lot between states, counties, and cities, leading to thousands of different tax rules. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no statewide sales tax.
What is GST (Goods and Services Tax)?
GST (often called VAT, or Value-Added Tax, in many places) is the main consumption tax in more than 170 countries, including Canada, Australia, India, and most of Europe. It is a multi-stage tax charged on the “value added” at every step of the supply chain.
- Who Collects It: Almost every business in the supply chain, from the company that provides raw materials to the manufacturer, distributor, and retailer, collects GST.
- How It Works: It is based on a system called the Input Tax Credit (ITC). Businesses pay GST on their supplies (inputs) but can claim that money back as a credit when they figure out the GST they owe on their sales (outputs). This process ensures that the total tax cost is only carried by the final consumer.
- Preventing Double-Taxation: Instead of using B2B exemptions like sales tax, GST uses the ITC system to cancel out the tax on the steps in between. The result is the same: only the final consumer pays the full tax, and a product is not taxed twice.
- Implementation: While there are different global models, many countries use one consistent national GST, which makes the system generally simpler and less complicated than the U.S. sales tax system.
Impact on Shoppers
For the average U.S. shopper, the two systems mainly differ in how clearly they show the tax and how consistent the rate is.
| Feature | Sales Tax for Consumers | GST/VAT for Consumers (Global Model) |
| Tax Visibility | High. Tax is added and clearly listed on the receipt at the register. | Varies. Tax is often included in the advertised shelf price. |
| Price Perception | The advertised shelf price is lower, as the tax is added at the end. | The advertised shelf price is the final price, which can simplify budgeting. |
| Rate Consistency | Very inconsistent. The rate depends entirely on the state, county, and city where you buy the item. | Generally more uniform. If the U.S. adopted a national GST, the rate would be the same across the country. |
| Online Buying | Complex “use tax” rules exist, where you might owe tax to your home state if an out-of-state seller didn’t collect it. | Cross-border sales are usually handled more clearly through rules for imports and exports. |
Impact on Businesses
The different structures create very different administrative and financial responsibilities for companies.
Sales Tax Rules for U.S. Businesses
The task of following sales tax rules is significant for U.S. companies, especially those selling across state lines, because the tax is decentralized.
- Filing & State Ties: Businesses must figure out where they have sales tax nexus (a strong physical or economic connection) and, therefore, where they must collect and send the tax. Following the 2018 Wayfair court ruling, many states now have economic nexus rules, forcing online sellers who reach a certain sales level (e.g., $100,000 in sales) to collect tax, even if they aren’t physically in the state.
- Rate Tracking: E-commerce companies must keep track of thousands of local tax rates and specific product exemptions. A product that’s tax-free in one county might be fully taxed in the next.
- Audits and Exemptions: Businesses must carefully track sales that are tax-exempt, mainly B2B transactions where a resale certificate is used. If they don’t properly record these exemptions, they can face huge fines during an audit.
GST/VAT Rules (Global Standard)
For companies that do business internationally, the GST compliance model is key to understand.
- Input Tax Credit (ITC): This is the main administrative feature. Businesses track the GST they collect on sales (output GST) and the GST they pay on purchases (input GST). They only pay the government the difference (or claim a refund if they paid more than they collected).
- Self-Policing: The ITC system helps prevent fraud. For a buyer to claim back the ITC, the seller must have first paid the output GST. This mutual verification helps keep the whole supply chain honest.
Conclusion
While both sales tax and GST are designed to tax consumption, their execution (one-time versus multi-stage) creates major differences for both shoppers and businesses. The U.S. system is clear for shoppers (tax is visible on the receipt), but forces businesses to deal with a massive, fragmented system of local rates and complex state connections. The global GST/VAT model, on the other hand, streamlines the process through the Input Tax Credit, creating a system that is more uniform and helps monitor itself, even if the tax is less obviously separated from the shelf price for the consumer.
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
