The Difference Between VAT, Sales Tax, and Customs Duties
What makes these taxes different and why it matters for international trade?
For companies engaged in cross-border trade, an understanding of taxes is a must, but one that normally tends toward confusion.
Many companies use the terms VAT, sales tax, and customs duties interchangeably. In reality, these taxes are fundamentally different in the way they are applied, collected, and finally, are paid.
This article explains various tax types and underlines the key differences between them. Understanding these taxes will help any international seller or expanding vendor to stay compliant and avoid expensive surprises.
At a Glance
| Type of Tax | Applied In | Levied On | Paid By | Refundable? |
|---|---|---|---|---|
| Value Added Tax (VAT) | EU, UK, Canada, Australia | Every stage of production and distribution | End consumer (via businesses) | ✅ Yes |
| Sales Tax | USA | Final retail sale | End consumer | ❌ No |
| Customs Duties | Worldwide | Imported goods at customs | Importer of record | ❌ No |
What is Value Added Tax?
VAT is a form of indirect tax levied on each stage of manufacture from production through the supply chain to final sale to the consumer.
- Common in: EU, UK, Canada, Australia
- Levied on: both domestically produced and imported goods/services
- Paid by: An end consumer, charged at every stage of the supply chain
- Refundable? Yes, businesses registered for VAT can reclaim VAT
Key features:
- Tax is levied on added value at each stage along the supply chain
- Businesses collect VAT on their sales (output VAT) and reclaim the input VAT paid on their purchases
- Ultimately, the end consumer bears the burden of the tax
What is a Sales Tax?
Sales tax is also an indirect tax, but it is levied only at the last point of sale to a final consumer.
- Common in: USA
- Levied on: Only retail sales
- Paid by: The end consumer
- Refundable? No
Key features:
- Collected singularly at the retail level
- Manufacturers and wholesalers do not normally pay sales tax
- Sellers commonly have to discount resale certificates to insulation business buyers
What are Customs Duties?
They are taxes imposed against the importation of goods into a country. Custom duties are meant for protecting the domestic industries and generating revenue for the government.
- Common in: all countries apply in some capacity customs duties
- Levied on: Imported goods on customs clearance
- Paid by: The importer of record
- Refundable? No
Key features:
- Calculated based on HS code, declared value, origin, and shipping costs.
- Vary depending on type of product, country of origin, and trade agreements.
- May be accompanied by tariffs, which are policy-based kinds of duties.
Do I have to pay all three?
Yes, in many cases, businesses must both customs duty and VAT be imposed on the imported goods. And if you happen to sell in a state where sales tax applies (e.g., the US), you may have to collect sales tax at checkout rather than charging VAT.
Generally speaking:
- Importing into the EU, customs duties + import VAT are imposed at the border.
- Selling to a US customer might require you to collect sales tax, depending on the state.
Being aware of where-and-how these apply will help you set-up your pricing, compliance, and logistics right.
Why this matters for international trade
These differences between VAT, sales tax, and customs duties help you and your business:
- Avoid surprise costs and shipping delays.
- Select the right Incoterms and assign tax responsibility properly.
- Ensure compliance with import/export and local tax laws.
- Reclaim VAT where possible to further reduce costs.
How Gerlach Customs can help you
Navigating international tax regulations can feel overwhelming, but you don’t have to do it alone. Gerlach Customs is a top provider of customs services throughout Europe.
We help companies with:
- Classifying goods and calculating customs duties
- Managing VAT and import tax compliance
- Acting as Importer of Record (IOR) when needed
- Providing full support with customs clearance across the EU
Need expert advice? Contact Gerlach Customs today to simplify your global trading activities.
Alessandro Denti
VAT Consultant
Frequently Asked Questions (FAQ)
Is VAT the same as sales tax?
No. VAT is charged at several stages of the supply chain, while sales tax is only charged on the final sale to consumers.
Do I have to pay VAT and customs duties at the same time?
Yes. When importing goods, customs usually charges both customs duties and import VAT before releasing the goods.
Why does the EU use VAT instead of sales tax?
VAT allows for better tax collection and reduces fraud by charging tax at each stage, not just on the final sale.
How are customs duties calculated?
Customs duties are based on the declared value of the goods, often using the CIF model: cost plus insurance plus freight, the product classification (HS code), and the country of origin.
