How does US sales tax differ from VAT and GST?
Edvin Givargis Published 11 minute read
The short answer
A value added tax or goods and services tax is collected in fragments at every stage of the supply chain, with each registered business charging tax on its sales and recovering the tax it paid on its purchases, so that the net burden lands on the final consumer. US sales tax reaches the same consumer by a different route. It is a single-stage tax imposed at the retail sale, and there is no input credit mechanism at all; the work that input recovery does in a VAT system is done by exemptions, chiefly the sale for resale exemption, which a seller can rely on only when it holds a properly completed exemption certificate from its buyer. The United States has no federal sales tax and no national VAT. Forty-five states and the District of Columbia impose their own sales and use taxes, while Alaska, Delaware, Montana, New Hampshire, and Oregon impose no statewide general sales tax, although local governments in Alaska levy their own. More than ten thousand local jurisdictions add rates on top of the state tax, and in some states localities administer their own tax separately from the state. Each state is its own system, with its own registration, its own list of what is taxable, its own exemption rules, and its own returns. Purchases that escape sales tax are generally subject to a complementary use tax that the buyer often must report itself. The Supreme Court of the United States held in South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), that a state may require a seller with no physical presence to collect its tax, and states now impose that duty once a remote seller's sales into the state pass a threshold the state sets, with marketplace rules shifting the duty to platforms for the sales they facilitate. A foreign company that expects one registration, one return, and full recovery of tax on its purchases will instead find a separate obligation in every state where it crosses a threshold, returns on different calendars, and tax on its own purchases that stays a cost unless an exemption applies.
One stage instead of many
In a credit-invoice VAT or GST, every business in the chain registers, charges tax on its supplies, and deducts the tax charged to it on its inputs. The tax authority collects a slice at each stage, and the invoice is the instrument that carries the right to recover. Because every intermediate business is made whole through its input credit, the tax paid along the way is economically neutral to the businesses and falls on the consumer who cannot recover it.
A retail sales tax reaches neutrality, to the extent it reaches it at all, by keeping business purchases out of the tax base rather than by taxing them and refunding the tax. A manufacturer buying components it will incorporate into finished goods, and a distributor buying inventory it will resell, generally purchase free of tax because the sale to them is exempt as a sale for resale. Tax is imposed once, when the goods or taxable services reach a buyer who will use or consume them. Where no exemption applies to a business purchase, the tax paid is simply a cost. It does not flow through to a return as a credit, and it is not refunded when the business later makes taxable sales of its own. Office equipment, supplies, software, and many other business inputs bear tax in most states on the same terms as a consumer purchase.
Two consequences follow. First, the base is narrower and less uniform than a VAT base. States tax tangible personal property as the general rule and services only where the legislature has enumerated them, and the list of taxed services differs sharply from state to state. A VAT practitioner accustomed to a presumption that every supply is taxable unless exempted must adjust to a system in which many services are outside the tax entirely in one state and taxable in the next. Second, tax that a VAT system would wash out through credits can stick in a sales tax system, building into the price of goods at more than one stage when business inputs are taxed and not exempted.
No federal tax, forty-six systems, and the local layer
There is no federal sales tax to register for, and a federal employer identification number does not create any sales tax registration. The obligation exists state by state. Each of the forty-five taxing states and the District of Columbia defines its own base, sets its own rate, grants its own exemptions, issues its own seller's permit, and prescribes its own returns. The five states without a statewide general sales tax are not uniformly tax-free for a seller either; Alaska has no state tax, yet its local governments impose sales taxes of their own, and many of them coordinate remote-seller collection through a shared intergovernmental commission.
Below the state level sit the local taxes. Counties, cities, and special districts in most taxing states add rates to the state rate, so the correct rate on a sale depends on the precise delivery location rather than on the state alone. In most states the local taxes are administered by the state alongside its own tax, reported on the state return. In a handful, some cities or other localities administer their own sales taxes, with separate registration, separate returns, and sometimes definitions that depart from the state's. A multistate agreement adopted by a subset of states standardizes certain definitions and procedures among its members and offers a single point of registration for them, but it does not reach every state, and the tax each member imposes remains its own.
The compliance shape is the most visible difference. A VAT-registered business typically files one return per period in each country where it is registered, and cross-border schemes in some regions let it report sales into several countries through a single filing. A US footprint can mean dozens of state returns, plus separate local returns in the home-rule jurisdictions, each on a filing frequency the state assigns, which may be monthly, quarterly, or annual depending on volume, and each with its own due dates, prepayment requirements, and rules for rounding, sourcing, and bad debts.
Certificates instead of input credits, and use tax instead of reverse charge
Because the resale exemption and the other business exemptions carry the neutrality that input credits carry in a VAT, the documentation that supports them carries the risk. A seller that makes a sale without collecting tax must generally be able to show why: a resale certificate, an exemption certificate, or other documentation the state accepts, complete, timely, and taken in good faith. The certificate is the seller's defense, not the buyer's paperwork. When an auditor samples the exempt sales and a certificate is missing, incomplete, expired, or taken after the fact on terms the state does not accept, the state assesses the seller for the tax it did not collect, with interest, and the seller's ability to recover the tax from a customer years after the sale is usually theoretical. The practical result mirrors a disallowed input credit in a VAT audit, except that the exposure falls on the seller for tax on its customer's purchase.
Use tax completes the structure. It is imposed on the storage, use, or consumption in the state of property and taxable services purchased without sales tax, and sales and use tax are complementary, so that the same transaction bears one or the other but not both. When an out-of-state vendor does not collect, the buyer owes the use tax and reports it directly. The same is true when a business buys goods tax-free for resale and then withdraws them for its own use, such as samples, demonstration units, or items consumed internally. The nearest VAT analog is the reverse charge on cross-border business purchases, but the resemblance is superficial. A reverse charge in a VAT is usually a wash, because the business that self-accounts for the output tax recovers it as input tax on the same return. Use tax self-assessed by a business is a real cost, recovered by no one.
Nexus after Wayfair, and where the recurring mistakes come from
For decades a state could require an out-of-state seller to collect its tax only if the seller had a physical presence in the state. South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), abandoned that rule. The South Dakota statute before the Court required collection by sellers delivering more than $100,000 of goods or services into the state, or engaging in 200 or more separate transactions there, on an annual basis. Every state with a sales tax now imposes collection duties on remote sellers under economic nexus rules of its own, with thresholds, measurement periods, and counted sales that vary from state to state. A foreign seller with no US entity, no US employees, and no US inventory can have a collection obligation in many states on sales volume alone. Income tax treaties offer no shelter, because they do not reach state sales and use taxes.
Marketplace rules add a second layer. The sales tax states have broadly adopted provisions that make an online marketplace or platform responsible for collecting tax on the sales it facilitates for third-party sellers. The definitions of a facilitator, the relief available to each party, and the effect of facilitated sales on the seller's own threshold differ by state. A seller that sells both through platforms and directly must track which sales the platform is collecting on and which remain its own responsibility.
The mistakes that foreign entrants make recur at the level of pattern, and each is a VAT instinct applied in the wrong place:
- Assuming a resale chain needs no documentation. In a VAT, a business-to-business sale is taxed and the buyer recovers the tax; the documentation question is the invoice. In a sales tax, the sale is exempt only if the seller holds the certificate, and a wholesale business that sells exclusively to resellers can still owe the full tax on every sale it cannot document. - Netting tax like an input credit. A seller that subtracts the sales tax it paid on its own purchases from the tax it collected on its sales, and remits the difference, has underpaid. Some states allow a narrow deduction or credit when property purchased tax-paid is later resold, but there is no general input credit, and tax collected from customers is held in trust for the state. - Registering nowhere because nothing triggered a federal registration. There is no national threshold, no federal registration that would signal the obligation, and no single authority that will notice a missing filer on behalf of the states. Each state measures its own threshold, and an unregistered seller accumulates exposure in every state it has crossed, with no filing to start a limitation period. - Treating sales tax as recoverable, or as a pass-through that can be fixed later. Tax paid on business inputs that are not exempt is a cost of doing business in the United States, not a receivable. On the sales side, tax the seller failed to collect is owed out of the seller's own margin, because the customer who should have paid it is rarely billed after the fact.
Practice notes
For a foreign company entering the US market, the order of operations matters more than the speed. Nexus analysis comes before the first sale: model projected sales by state against each state's economic threshold, identify any physical presence that creates nexus without regard to thresholds, such as inventory held in a third-party warehouse or employees working in a state, and decide which states require registration at launch and which require monitoring. Registration follows, state by state and, where required, locality by locality, timed so that the permit is in place before collection must begin. A taxability matrix comes next, mapping each product and service the company sells to its treatment in each registered state, because the same offering can be taxable in one state and exempt in the next. The exemption certificate process belongs in the order-to-cash system from the start, so that no exempt sale ships without a valid certificate on file and certificates are renewed before they lapse. Finally, a marketplace analysis should determine which sales channels shift collection to a facilitator, how facilitated sales count toward the company's own thresholds, and what the platform's reporting will and will not cover. A company that has already been selling into the United States without this analysis should size its historical exposure before registering, because registration in a state where liability has already accrued can close the door to a voluntary disclosure agreement that would otherwise limit the lookback and abate penalties. G&G State Tax Group provides sales and use tax nexus studies, taxability reviews, and US market-entry planning alongside its state and local tax practice.
This article states the law as of September 26, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group, or another state and local tax adviser, to confirm what has changed since this was written and how the rules apply to a specific situation.
This publication is informational in nature and is not, and should not be considered, legal, accounting, tax, or other professional advice for any person or situation. Correct application of tax law depends heavily on the facts and circumstances in each case, and G&G State Tax Group, LLC assumes no liability in connection with the use of this information, and is not obligated to inform any reader of changes in the law or other factors that could affect the information contained herein.