Sales Tax vs VAT vs GST - Your Guide to Consumption Taxes

If you’re a business owner of any kind, you must understand consumption taxes. It touches every stage of production and every point of sale.

• Every time you pay for a material or service to create your product, you could be paying some amount of consumption tax.
• Every time you sell your product to a customer, you should be charging some form of consumption tax.
• Every tax season, you should be sending off a chunk of consumption taxes that you’ve collected.

We’re talking sales tax, VAT, GST, and a few others you’ve likely heard of — especially if you’re selling outside of your home base.

Yep, as a business owner, you’re basically swimming in an ocean of consumption taxes, with each having different currents and speeds. We’ll explain what consumption taxes are, and most importantly, what the differences are between VAT, GST, and US sales tax.

What are consumption taxes?

Consumption taxes are applied to the purchase of goods and services. There are different kinds of consumption taxes, depending on the country. They can be a flat rate applied to every transaction, or a percentage of the total value. Each type requires something different from you, the business owner.

But one element always stays the same. The end customer pays the tax, because they are who’s actually consuming the end product. And it’s a tax on consumption. On buying and spending for one’s own personal use.

Why tax this? For government revenue, of course. Some governments charge a consumption tax instead of an income tax. Or, if you live in the EU, you have both.

Charging on consumption can be tricky, though, and requires an economic balancing act. The tax rate needs to be high enough that the government gets their funding, but not so high as to discourage consumer spending. If customers stop buying, then there’s less overall tax to collect anyway — and businesses like yours are hurting in the process. No good.

Let us break it down:

Who pays sales tax, VAT and GST?

To understand how consumption taxes work, it’s actually easiest to begin at the end: the final point of sale to the end consumer.

At the final point of sale, the end consumer pays the tax to the vendor (that’s you). The vendor collects that tax and sends it along to the government when taxes are due. So you can think of yourself as the middleman for these consumption taxes.

But sometimes there are payments of consumption tax before that final sale. Some governments charge tax at each stage of the production process, from whoever contributes to the final market value.

But this all depends on what type of consumption tax it is, so let’s parse them out.

What is Value-added Tax (VAT)?

Value-added tax (VAT) is one where the consumption tax is charged at each stage of the production chain. At each stage, it’s assumed there’s an increase in the value of the good or service. That increase, the “value added,” is what’s being taxed. But the cool thing is that, as a business owner, you get back whatever VAT you’ve paid in the chain. Only the end consumer pays out of pocket.

How exactly does this work? So, you pay some amount of VAT to other businesses who help you make your product. These slivers of VAT are called “input taxes,” and you get a tax credit for them.

At the end of the season, once you’ve collected VAT from all your customers (“output taxes”), you are supposed to send the VAT to the government, right? Right. But first, you can discount all the input tax from the total, so that money goes back in your pocket.

If you’d like to learn about how VAT works in the EU specifically, check out our ultimate EU VAT guide.

What is Goods and Services Tax (GST)?

A Goods and Services tax (GST) is also levied at every step of the supply chain. But unlike VAT, GST is charged regardless of what value is added; it’s usually just a flat-rate percentage of the transaction.

In Australia, GST works like so: The businesses are charged at each stage of the manufacturing process, and the end customer is charged at the point of sale. The GST is then refunded to everyone through tax credits, except the end consumer.

Which countries have GST?

As of 2025, numerous countries around the world have adopted a GST system as a key component of their taxation framework. Nations such as Canada, India, Australia, New Zealand, Singapore, and Indonesia have implemented GST to streamline tax collection and enhance economic efficiency. Many countries across the Asia-Pacific and Oceania regions are also embracing similar GST models. These implementations reflect a global trend toward simplifying compliance and promoting transparency.

Take Canada as an example.

As of 1991, Canada charges a nationwide GST of 5%. Some provinces charge a provincial sales tax (PST) on top of the GST; others use a harmonized sales tax (HST) to simplify the tax filing process by sending the entire amount directly to the Canada Revenue Agency.

If a foreign seller wants to sell to Canadians, you may be required to register for a Canadian Business Number and sign up for the GST/HST in order to remit the proper taxes. If you plan to sell through Amazon’s marketplace (whether or not you intend to use Fulfillment by Amazon), it’s worth checking out the company’s Global Selling guide to make sure you’re covered.

Of course, there are exceptions to the rule. If you sold less than $30,000 to Canadian buyers over a rolling period encompassing the last four quarters, you likely won’t be required to file GST (though you may still be obligated to pay PST in some provinces). Canada also has a list of “zero-rated” goods and services. If you sell items on this list, you won’t have to pay GST on them.

You can learn more about Canada’s approach to taxing digital goods and services in our detailed guide: Digital Sales Tax in Canada (GST, HST, and more).

What is US Sales Tax?

Technically, all of these taxes listed could be called a type of “sales tax”. But what we mean here is a simple, one-time tax charged at the point of purchase. The money goes from the consumer, to the vendor, to the government, the end. This form of sales tax exists throughout the United States, determined at the state and local levels. (There is no overarching national sales tax in the US.)

Because the states and local municipalities can all decide their various rules, sales tax in the US is notoriously complicated… To understand how the system works, check out our primer on US sales tax on digital products.

VAT vs Sales Tax

From your perspective as an online business owner, VAT and sales tax are basically the same. It’s just that VAT is the most common consumption tax system in the world, while sales tax exists only in the United States.

That said, the primary difference between VAT and sales tax lies in how the taxes are applied throughout the production chain.

Imagine you’re buying a smart tablet from a retailer in the US. Let’s say the tablet costs $200, and if you’re in a state with a 7% sales tax, you’ll pay $214 at the checkout. Subsequently, the retailer forwards the $14 collected in sales tax to the state.

What many US consumers may not realize is that, in this scenario, they bear the entire burden of the sales tax. However, this isn’t the case under VAT systems.

In a VAT system, the tax burden is spread across various participants in the supply chain. For instance, in our smart tablet example, there are materials suppliers, manufacturers, retailers, and consumers involved in the transaction. Each of these players contributes to the €14 tax burden, as the product is transacted forward. The end consumer only pays a smaller share of it!

GST vs VAT

From your perspective as an online business owner, VAT and GST are essentially the same. Both are consumption taxes applied at each stage of the supply chain, and both ultimately ensure that the final consumer bears the tax burden. The main distinction is that VAT is widely used in Europe, parts of Asia, and Africa, while GST is the preferred system in countries like India, Australia, Canada, and some others.

That said, the primary difference between VAT and GST lies in their scope and structure. VAT is applied mainly to goods, with services often taxed separately or under different rules, depending on the country. GST, on the other hand, is a comprehensive tax that covers both goods and services under a single, unified system, streamlining compliance and reducing the complexity of managing multiple indirect taxes.

Imagine you’re selling a smart tablet online. Under a VAT regime, each participant in the supply chain—materials supplier, manufacturer, distributor, retailer—pays VAT on the value they add to the product. Each business can claim a credit for the VAT they paid on their inputs, and only the value added at each stage is taxed. However, VAT rates and rules can vary by region or product, and services may be taxed differently or separately.

Under GST, the process is similar in that tax is applied at every stage of the supply chain and businesses claim input tax credits for taxes paid on their purchases. The key difference is that GST applies uniformly to both goods and services, and is designed to be more streamlined and transparent, with a consistent structure and fewer cascading effects (tax on tax).

In summary, while both VAT and GST are designed to tax consumption and allow for input tax credits, GST is typically broader in scope, more uniform, and more efficient in reducing the cascading effect of taxes compared to traditional VAT systems.

Sales Tax vs GST

Again, sales tax and GST are essentially the same in the eyes of the average business owner. Sales tax is primarily used in the United States, while GST is the standard in countries like India, Canada, Australia, and others.

The primary difference between sales tax and GST lies in how and when the taxes are applied throughout the supply chain.

Imagine you’re selling a pair of sneakers in the US. The sneakers cost $100, and if you’re in a state with a 7% sales tax, your customer pays $107 at checkout. As the seller, you collect the $7 sales tax and remit it to the state. The entire tax is collected at the final point of sale to the consumer—none of the manufacturers, wholesalers, or distributors pay or collect sales tax on their transactions. The consumer alone bears the full tax burden.

Under a GST system, the process has many more steps. Suppose you’re selling those same sneakers in a GST country like Canada. The manufacturer buys materials for $50 and pays 5% GST ($2.50) to the supplier. The manufacturer makes sneakers and sells them to a wholesaler for $80 plus 5% GST ($4). The manufacturer claims a credit for the $2.50 GST already paid and remits only the difference ($1.50) to the government. The wholesaler sells the sneakers to you, the retailer, for $100 plus 5% GST ($5). The wholesaler claims a credit for the $4 GST already paid and remits only $1 to the government. You, as the retailer, sell the sneakers to the customer for $100 plus 5% GST ($5). You claim a credit for the $5 GST already paid and remit nothing further on that sale.

At each stage, GST is collected and remitted on the value added, and businesses can offset the GST they’ve paid on their inputs. This system spreads the tax burden across the supply chain and eliminates the cascading effect (tax on tax).

In summary, while both sales tax and GST are designed to tax consumption, sales tax is a single-stage tax collected only at the point of final sale, with no input tax credits. GST, by contrast, is a multi-stage tax applied at every step of the supply chain.

The less-common consumption taxes

The last couple are two that your business probably won’t encounter often, especially if you sell digital goods. Nevertheless, they’re in the consumption tax family. To have a better vocabulary and a basic understanding, it doesn’t hurt to know these taxes by name and how they operate.

Import duties or tariffs

Of course you know about imports. They’re half of the age-old trade economy! Import duties, also known as tariffs, are consumption taxes levied on certain goods when they enter a country. The tax goes to custom agencies. Usually, this is how it plays out: the importer pays the duty to customs when the product first arrives. He then passes the cost to the end customer, adding it to the price of the item.

Aside from raising money for the local government, another goal of import duties is to protect local producers and domestic markets. A country may feel threatened by cheaper goods coming in from elsewhere. To protect their economy, they might add tariffs on certain imports to make them more expensive and, obviously, less attractive.

It’s important to pay attention to customs and import tax rules if you have a dropshipping business. While sales tax rules for dropshipping are complicated alone, there’s even more complexity if you’re importing goods!

For example, in the US there are several different fees attached. When you import products in bulk with a value over $800, then the import taxes will include the customs duty, a merchandising processing fee, and port maintenance fees. The duty rate will depend on the value of the imported product and the HS (or HTS) code of the product. (You can check the HS code of your product and its import duty directly on the US International Trade Commission website).

Excise tax

This is a tax applied to specific goods, usually to discourage people from buying them because the government views those items as being bad for society at large. This usually means items like cigarettes, alcohol, gasoline, etc. Actually, this tax is sometimes called the “sin tax.”

The government wants to regulate consumption, and they do so through applying a special tax, an excise tax. This is initially paid by the manufacturer, then passed along to the consumer in the final purchase price. Learn more about the differences between excise tax and sales tax.

Final word

Knowing the various types of consumption tax is important, but it’s actually not enough to run a smooth, tax-compliant business. Even among the countries in the world who use VAT, their VAT systems could be wildly different from each other. Each tax system can have its own national quirks, not to mention different rates.

So how can you truly stay on top of consumption taxes, while still running your business? You can find a software solution that automatically handles sales tax and tracks any changes to tax policy around the world.

Don’t let sales taxes consume any more of your time. (Yes, pun intended.) Exit the maze and let Quaderno navigate world-wide digital tax laws for you. Every transaction is tax compliant, no matter where your customer is based. You never have to worry about collecting the right amount of consumption tax or about keeping the right records.

Quaderno charges the right amount of tax automatically, and then automatically sends customized receipts. Sounds too good to be true? Check out how we’ve solved digital taxes for online creators.