What Is the Difference Between the Sales Tax and the Value-Added Tax (VAT)?

Value-added tax (VAT) has the characteristic of being applied to every stage of a product commercialization, starting from the purchase of raw materials, all the way up to its final sale to the end consumer. However, the intermediaries that bring the product to the end consumer (B2C) only have to pay the government the difference between the taxes applied on the purchase of the product from the suppliers and the taxes applied on the sale of the product to the end consumer, explaining the term value-added tax. Canada, France and Great-Britain are good examples of countries that apply this tax.

VAT differs from sales tax in that it is only imposed once on the final retail sale price. If we take the American sales tax for example, it is only applicable on retail goods and services when a product reaches its final form, but not on the added value. This means that no tax is applied on the sale of raw materials, unfinished goods, or wholesale if the intermediary purchases these with the intention of reselling them on the retail market. The sales tax is only be applied once on the sale or lease of goods or services to the end consumer.

For the consumer, there is no difference between the two taxes in terms of payments because in both cases the tax rate is applied on the total final amount, which is the amount that they will have to pay.