VAT vs GST vs sales tax: How they differ and which one applies to you

Key takeaways

• Indirect taxes known as VAT or GST operate in 174 countries. The US is the largest economy in the world with neither.

• VAT and GST work the same way. You collect tax on your sales, pay it on your purchases, and send the government the difference, so it never comes out of your own pocket. US sales tax is charged once, at the final sale, with nothing to offset.

• Which tax you charge is decided by where your customer is, not by where you are. Whether you charge it at all depends on whether you have crossed that market's registration threshold.

Indirect tax can be called different things depending on where your customer sits. Sell to the EU, the UK or Latin America, and you are dealing with value added tax (VAT). Sell to Australia, Canada, India, New Zealand or Singapore, and it is goods and services tax (GST). When selling anywhere in the US, it is sales tax, set by individual states and local jurisdictions rather than nationally. All three are indirect taxes, meaning you collect them from your customer and pass them to the government rather than paying them yourself.

When selling into several markets, you are charging, invoicing, and filing under all three at once. Each sets its own rules for who charges what, and the rates and categories change from one year to the next. If you end up charging too little, you have to absorb the difference. If you charge too much, your customers will likely notice.

Here is how each indirect tax works, and how to tell which applies to a given sale.

What is VAT?

You charge VAT on what you sell, you pay it on what you buy, and you hand the tax authority the difference. The tax is never a cost to your business. You are collecting it on someone else's behalf, and calculating the correct amount right is your responsibility rather than your customer's.

Rates vary more than most people expect. The average standard rate across the 38 OECD (Organisation for Economic Co-operation and Development) economies was 19.3 percent at the start of 2024, and 23 of them apply 20 percent or more. Most VAT countries also run reduced rates for categories like food, books and medicine, so one country can have four or five rates in play at once.

What is GST?

Goods and services tax works the same way as VAT. You collect it on your sales, pay it on your purchases, and send the government the difference.

What differs between GST countries is how many rates there are and who levies them. Australia and Singapore each run a single rate. Some countries run several at once, and others layer a federal tax with separate provincial ones, so what your customer pays can depend on their province.

What is sales tax?

Sales tax works a little differently. It is charged once, at the final sale to the end-user, rather than at every stage. If your customer is buying to resell, they do not pay it and they have nothing to offset later. They give you a resale or exemption certificate instead, which means you need that certificate on file before you invoice, not after.

There is also no national version. 45 states levy sales tax, 38 of those let cities, counties and transit districts add their own on top, and the rate your customer pays depends on their address. What counts as taxable is the bigger complication. That differs by state and by product, and many services are exempt by default.

Which tax applies to your sale?

Where your customer is located determines which tax applies. Where you are registered decides whether you charge it at all. A first sale into Germany, for example, does not make you a German VAT collector. Crossing Germany's registration threshold does.

Once you are registered in a market, two things settle the rest.

1. Whether your customer is a business or a consumer. In the EU and the UK, cross-border sales of services to a registered business usually shift the tax to the buyer under the reverse charge, so you charge nothing but still have to hold a verified VAT number and show the reverse charge on the invoice. In the US, a business buyer can be exempt but only with a valid certificate on file.

2. What you are selling. The rate depends on the product category, and in some markets whether the sale is taxable at all. More than 100 jurisdictions now require non-resident sellers to register and collect on digital sales.

What this means for your prices and invoices

In VAT and GST markets, consumer prices are usually shown with tax included, because that is the number the customer expects to pay. In the US, sales tax is typically added at checkout. Sell into both and the same product has to be priced two different ways, which is better decided intentionally rather than discovered at launch.

Your invoice also carries more weight in a VAT or GST market than it does in the US, because it is the document your business customer needs in order to subtract it. A missing registration number or the wrong rate becomes their problem first and yours shortly after.

None of it holds still either. Rates move, categories get redefined, and new rules for digital services arrive every year. Charging the right amount is not something you figure out once. You have to stay on top of it. Underbilling leads to revenue leakage and corrections. Overbilling creates customer dissatisfaction.

How Airwallex Billing helps businesses charge the right tax

Airwallex automatically calculates and applies the correct tax at the point of billing, so a business charges the right amount in every market without maintaining rates and rules itself. Automatic Tax Calculation resolves each transaction using four inputs: your customer's location, your tax registrations, the product or service being sold, and whether your prices include tax or add it on top. It applies the result across invoicing, subscriptions and checkout, with a clear tax breakdown on every transaction, across supported countries, states and provinces. Most tax tools sit on top of a payment provider, whereas with Airwallex, tax is built directly into the billing workflow. Learn more about Airwallex Billing.

Frequently asked questions

Is GST the same as VAT?

Mechanically, yes. Both are charged at each stage of the supply chain and both let registered businesses subtract the tax they paid on purchases.

Does the US have VAT?

No. The US is the only OECD member without a VAT or GST. It uses retail sales tax instead, levied by states and local jurisdictions rather than nationally, which is why there is no single US rate to quote.

Who actually pays VAT, the business or the customer?

The business collects it and passes it on, but the cost lands on the final consumer. A registered business buyer subtracts what it paid, so for them the tax is a cash flow item rather than a cost. For a consumer, it is simply part of the price.

Do you charge tax on your first sale into a new country?

Usually not, because charging it depends on being registered there, and registration is normally triggered by crossing that market's threshold. The exception worth knowing is that some markets set no threshold at all for sellers with no local presence, in which case the obligation can start with the first sale.

Do you charge VAT to a business customer in another country?

Typically no. For cross-border sales of services between businesses in the EU and the UK, the reverse charge usually applies and the customer accounts for the tax in their own country. You still need to hold their VAT number, verify it, and state on the invoice that the reverse charge applies.

Can prices include tax?

Yes, and in most VAT and GST markets consumer prices are expected to. Either approach works as long as the transaction shows a clear tax breakdown, which is what your customer needs in order to subtract it and what you need in order to report it.

Is sales tax charged on services?

Sometimes. US sales tax was built around goods and many services are still exempt, but states have been steadily extending it to services, software and digital products. Eight states changed their treatment of software or digital services between 2024 and 2027.

Sources

OECD, Consumption Tax Trends 2024. https://www.oecd.org/en/publications/consumption-tax-trends-2024_dcd4dd36-en.html

OECD, VAT policy and administration. https://www.oecd.org/en/topics/vat-policy-and-administration.html

European Commission, Value added tax. https://taxation-customs.ec.europa.eu/taxation/vat_en

GOV.UK, VAT Notice 741A: place of supply of services. https://www.gov.uk/government/publications/vat-notice-741a-place-of-supply-of-services

Sales Tax Institute, SaaS sales tax expansion by state. https://www.salestaxinstitute.com/resources/saas-sales-tax-expansion-by-state

Australian Taxation Office, GST. https://www.ato.gov.au/businesses-and-organisations/gst-excise-and-indirect-taxes/gst

Inland Revenue Authority of Singapore, Goods and Services Tax. https://www.iras.gov.sg/taxes/goods-services-tax-(gst)

Tax Foundation, 2026 sales tax rates, midyear update. https://taxfoundation.org/data/all/state/2026-sales-tax-rates-midyear/