Explanation of Value Added Tax

Description: Value-added tax (VAT) is a consumption tax that is applied to goods and services at each stage of the supply chain where value is added, from initial production to the point of sale. The amount of VAT the user pays is based on the cost of the product, minus any costs of materials in the product that have already been taxed at a previous stage.

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More than 160 countries use a VAT system. It is most commonly found in the European Union (EU). 

It’s important to note that there is no VAT in the United States.

To avoid confusion, advise customers to use standard sales tax reports.

Simplified Example of the Process of VAT

The following is an explanation of VAT applied to coffee sold by a coffee shop owner in a shop that contains coffee beans roasted by a nearby roaster with beans grown by a local farmer. Assume a VAT of 10%. Each person or business involved in the chain must complete VAT government paperwork.

• Fresh coffee beans first come from the local farmer. If the roaster pays a total of $5.00 per pound of fresh coffee beans, the VAT, which is $0.50 ($5.00 x 10%), is added to that cost, so the farmer receives a total of $5.50 from the roaster for each pound of coffee beans.
• The roaster roasts the coffee beans and charges the coffee shop owner $10.00 per pound of roasted coffee beans. This means that the shop owner must pay a total of $11.00 per pound, $10.00 for the roasted coffee beans, and 10% VAT which is $1.00. However, because the farmer already paid the first $0.50 to the government, the roaster only has to pay $0.50 in VAT to the government.
• The coffee shop owner can use each pound of roasted coffee beans to sell 5 cups of coffee at $4.00 each for a total of $20.00. For every 5 cups of coffee sold, the shop owner receives a total of $22.00 from customers who buy his coffee, $20.00, and $2.00 VAT. However, because a total of $1.00 in VAT has already been paid to the government by the farmer and roaster before, the shop owner only pays $1.00 to the government.