Value Added Tax
A consumption tax levied at each stage of production and distribution, collected by businesses on behalf of the government throughout the supply chain.
FAQs
Why doesn't the United States use VAT?
The US has historically relied on income taxes rather than consumption taxes at the federal level, and the political environment has made federal VAT adoption difficult. Additionally, sales tax is administered at the state level in the US, and replacing or supplementing it with a federal VAT would require significant constitutional and political changes.
What is the reverse charge mechanism in VAT?
The reverse charge mechanism shifts the VAT accounting obligation from the seller to the buyer in B2B cross-border transactions. Instead of the foreign seller registering for VAT in every country it sells into, the domestic business buyer self-reports the VAT (both output and input tax) on their own VAT return. This is the standard mechanism for B2B digital services in the EU.
Do US SaaS companies need to charge VAT to European customers?
Yes, for B2C (sales to consumers). US SaaS companies with sales to EU consumers exceeding the applicable threshold must register for VAT (usually via the EU OSS system) and charge VAT at each customer's country rate. For B2B sales to VAT-registered EU businesses, the reverse charge usually applies and the US company typically doesn't need to collect VAT.
Related Terms
Goods and Services Tax
A broad-based consumption tax applied to most goods and services, similar to VAT, used in Canada, Australia, India, Singapore, and other countries.
Sales Tax Nexus
The level of connection between a business and a state sufficient to require the business to collect and remit sales tax in that state.
Economic Nexus
A sales tax obligation trigger based on the dollar value or number of transactions in a state, regardless of physical presence, established after South Dakota v. Wayfair (2018).