US businesses do not pay or collect Value-Added Tax (VAT) on domestic sales because the United States does not have a federal or state-level VAT. Instead, U.S. businesses operate under a state-based retail sales tax system. However, U.S. businesses that export goods or services to countries with VAT (like the EU, UK, or Australia) may be required to register, collect, and remit foreign VAT, particularly if they meet certain sales thresholds.
US-based companies generally need to register for VAT in the following scenarios: Making sales to individuals or non-VAT registered businesses in a VAT country – some countries have sales thresholds, but many require businesses to charge VAT from the first sale, no matter how little the sale was for.
When not to charge VAT
The United States does not have a Value Added Tax (VAT) at either the federal or the state level. Sales and use taxation in the US is operated independently by each of the 50 states and the District of Columbia. Sales taxes are administered by every state except Alaska, Delaware, Montana, New Hampshire, and Oregon.
Certain goods and services are exempt from VAT. This means that they are not subject to VAT and therefore, do not incur the standard 20% VAT charge. Exempt goods and services include insurance, education, and health services.
You must register your business for Value Added Tax (VAT) if the total value of taxable goods or services is more than R1 million in a 12-month period, or is expected to exceed this amount. A business may also register voluntarily if the income earned in the past 12-month period exceeded R50 000.
Any business selling physical or digital goods in the EU, including non-EU sellers, must collect VAT according to local regulations and laws.
The US lacks a federal VAT system due to its federalist system of government, which delegates tax management responsibilities to individual states. Implementing a centralized, nation-level VAT system in the US would require significant efforts to unify diverse tax systems.
Some traders are not registered for VAT because their businesses have sales (turnover) below the VAT registration threshold and so they cannot charge VAT on their sales (unless they decide to register voluntarily – see the heading below: Voluntary registration). Also some business activities do not attract VAT.
Goods and services exempted from VAT are: Non-fee related financial services. Educational services provided by an approved educational institution. Residential rental accommodation, and.
If a VAT payment is late, the first contact from HMRC is likely to be an automated letter. You'll also receive a penalty and have to pay interest on the outstanding amount. If you still do not pay what you owe, HMRC can take legal action against your business and potentially even force it into liquidation.
VAT vs. Sales Tax: VAT is an indirect tax applied at every stage of the supply chain, with businesses charging VAT on sales and reclaiming VAT paid on purchases. The US system uses Sales Tax, typically applied once at the point of sale to the end consumer, without an input tax recovery mechanism.
VAT (Value Added Tax) and GST (Goods and Services Tax) are fundamentally the same type of consumption tax, levied on goods and services at each stage of the supply chain, but the terms are used in different countries and can have structural differences, with GST often being a unified, simpler system replacing multiple taxes (like VAT, sales tax, excise duty) into one, as seen in India and Canada. Both ensure the final consumer pays the tax, while businesses get credits for tax paid on inputs, but specific implementation, rates, and administration vary by country (e.g., EU uses VAT, India uses GST).
VAT Number vs EIN
The biggest distinguishing factor between VAT (Value Added Tax) numbers and EIN (Employer Identification Numbers) lies in their geographical and functional application within business and taxation frameworks.
The majority of goods exported to the US can be zero-rated for VAT. In other words, you don't need to charge VAT on the exported goods or extra charges such as shipping and delivery.
A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax.
Visitors are encouraged to contact representatives of the country or territory in question for official rates. Please note that the U.S does not have a national VAT or GST. The U.S does, however, have a Sales Tax that varies from state to state.
The U.S. is one of the few countries that does not charge VAT or GST. Instead, the U.S. uses state sales tax as its method of taxation.
While the system may seem complex, US companies must understand it, as non-compliance risks heavy penalties and missed opportunities to reclaim VAT on expenses. For US companies, VAT applies when selling to UK businesses or consumers, whether through physical goods or digital services.
VAT exempt supplies of goods and services – what are they?
Do small businesses pay VAT? Well, some do, and some don't. Whether or not your business pays VAT isn't so much to do with the size of your business as it is to do with your annual turnover. This is referred to as the VAT threshold.
VAT is a tax which is ultimately paid by the consumer, and is not a tax on individual businesses. VAT is typically included on business invoices.
VAT is charged on things like: