VAT, GST and will the U.S. see a national tax?

Wouldn’t it be amazing if your online business had to deal with just a single sales tax rate?

Any business that sells into America knows that sales tax is still a complex web of different rates and requirements. There has occasionally been discussion about instituting a nationwide standard sales tax in the US only to find the concept tough to advance. And if you sell products and services internationally in places like Europe and Canada, you’ll encounter what appear to be national sales taxes, VAT and GST tax systems, only to find they too frequently change according to borders and new e-commerce updates.

What is the latest word on global uniform sales taxes?

25 years and counting

One recent U.S. uniform sales proposal is The FairTax Act, which aimed to replace major sources of federal revenue such as income taxes, estate and gift taxes, capital gains, and payroll tax. It would also do away with the IRS.

The most recent version of the FairTax proposes a 23% sales tax on retail sales of goods and services, administrated by the 50 states and the District of Columbia. (In the five NOMAD states without a sales tax, the Secretary of the Treasury or another state would administer the national sales tax.) States would conform to the national sales tax or administer two separate sales tax systems. Businesses would receive a “taxpayer administrative credit” of 0.25% of the amounts collected as compensation.

Some version of the FairTax has been introduced in each new Congress for a quarter of a century; the latest is H.R. 25-Fair Tax Act of 2023. The Act has never moved beyond committee, according to the Tax Foundation and observers have attributed the lack of progress partially to the federal revenue potentially taking a deep initial hit and to the concept of abolishing the IRS being a partisan hot button.

Look for no progress on a national American sales tax anytime soon.

European sales taxes

Europe’s value-added tax (VAT) is applied at each stage of the supply chain. It’s recoverable by most businesses and, like U.S. states’ sales tax, rates are generally applied at a local (in Europe’s case, usually by country) level with exceptions on certain products. Historically, Hungary, Denmark, Croatia and Sweden have the highest VAT and Luxembourg, Malta, Romania, Germany and Cyprus the lowest.

There is a standard VAT registration for each country, but you can sometimes use a simplified registration in one European Union state and report all sales to all member states. You pay any VAT liabilities to the tax office of the appropriate country. (Latin America and Mexico also have VATs.)

Each party in the supply chain charges, remits and recovers VAT until the transaction reaches the final individual consumer. A private individual cannot recover the VAT.

The EU is constantly working to refine and modernize VAT collection. Most recently the EU instituted a customs data hub to streamline companies’ administration of importing goods. The new ViDA, or “VAT in the Digital Age,” will impact e-invoicing, ecommerce sellers and looks to close the VAT gap by making marketplaces and ecommerce platforms liable for charging and remitting VAT within the EU.

Canada

Our neighbor to the north applies a Goods and Services Tax (GST), which in some Canadian provinces combines with a Provincial Sales Tax (PST) to produce a Harmonized Sales Tax (HST).

In charging different rates for different geographic areas (provinces), Canada resembles the U.S. though of course with fewer “states” and none of the local taxing rules and rates found in the US. The HST applies in New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Prince Edward Island. The GST solely applies in Alberta, Northwest Territories, Nunavut and Yukon. The provinces that levy a PST in addition to the GST are British Columbia, Manitoba, Quebec (the Quebec sales tax is the “QST”) and Saskatchewan.

GST/HST is registered under one account, and the province of a customer’s residence dictates what sales tax rate to charge. Generally, a company is deemed to “carry on” business in Canada if it sells products to customers in Canada and uses Canadian-based resources, including local advertising or warehouses. Sporadic shipments to customers do not constitute regular and continuous business activity, but most goods and services in Canada are considered taxable.

Online businesses selling into Canada, except for those meeting a small-supplier exception, register with the Canada Revenue Agency for a GST/HST account just as they register with U.S. tax jurisdictions in which they have nexus. (A “small supplier” is a company whose revenue from worldwide taxable supplies falls below a certain threshold over the last year.)

Clearly if you sell internationally, remember that a simple “national sales tax” is a long way from reality in most of the world. (Check out our webinar on sales taxes as your global sales grow.)

If you sell even into another country, you may have to collect and remit sales-like taxes if you hit economic thresholds. Contact us to learn about the latest global sales tax developments and what they mean to your company.