Value-Added Tax (VAT): What It Is & Who Pays

Here's how value-added tax works, what it is and how you can get your VAT refunded if you shop while traveling.
Value-Added Tax: What It Is and How VAT Tax Works

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If you’ve ever traveled outside the United States and done some shopping, chances are you’ve noticed a VAT, or value-added tax, on your receipts. Here’s what VAT is, how it works, and how you might be able to get your money back.

What is value-added tax (VAT)?

A value-added tax is a tax on products or services when sellers add value to them. Similar to a sales tax or excise tax, consumers pay the VAT tax, which is typically a percentage of the sale price. There is no VAT in the United States.

How value-added tax (VAT) works

Value-added tax is typically a percentage of the sale price. For example, if you purchase a pair of shoes for $100, and the value-added tax rate is 20%, you would pay $20 in VAT at the register when you pay for the shoes.

  • The value-added tax rate varies by country.

  • In some countries, VAT is called goods and services tax, or GST.

  • Some countries exclude certain goods or services from the tax.

  • The European Union requires that an EU country’s VAT rate must be at least 15%. Some things qualify for a reduced rate, which has to be at least 5%.

  • Although businesses may pay value-added tax on the goods and services they buy, they generally get to recoup those payments from the VAT they collect from their customers. The businesses then remit what’s left to the government.

Is there VAT in the U.S.?

There is no VAT in the United States. But even though the United States doesn’t have a value-added tax, it does require consumers to pay federal excise taxes on the purchase of gasoline, alcohol, tobacco and other products. In addition, several states and cities collect sales taxes. Intuitively, the concepts are similar in that they are all taxes on consumption. The difference is in how the tax is collected. Over 100 countries have a VAT.

How to get a VAT refund

If you visit a country that has a VAT, you might be able to get a refund on the tax you pay when you shop there. Beware: There are a lot of steps, and some travelers decide the refund process isn’t worth the trouble. Here are some of the general rules, but before you travel, be sure to check the VAT rules in the country you plan to visit.

  • Typically, you have to pay the value-added tax at the time of purchase, and then apply for a refund from the shop.

  • Usually, your purchase must be over a certain amount in order to qualify for a VAT refund. In the EU, for example, you have to buy at least 175 euros worth of stuff in a shop. The threshold isn’t cumulative, meaning that spending 100 euros in one shop and 100 euros in another shop doesn’t meet the minimum. It may be worth it to consolidate your shopping if you’re angling for a VAT refund.

  • Spending on food and hotels often isn’t eligible for VAT refunds.

  • You usually have to be a visitor to get a VAT refund. The address on your passport matters here. You might qualify as a visitor if you’re living in the country temporarily but have a permanent home somewhere else.

  • You’ll likely need to show the store clerk proof that you live outside the country, and you’ll have to fill out a form.

  • Some shops don’t offer VAT refunds. Some shops process the refund directly, and some shops use third parties to process the refund. Ask for written instructions about how to claim your VAT refund.

  • Sometimes the shop charges a fee for VAT refunds, so be sure to ask about that ahead of time.

  • Usually you’ll need to mail your stamped VAT refund form to an address the shop provides. But you don’t always have to wait to get back home. Some big airports, ports and train stations have VAT refund offices where you can get your refund right away — if the retailer you shopped at uses that office.

  • When you go home with your stuff, a customs officer has to stamp your refund paperwork as proof of export. Without the stamp, you won’t get your VAT refund.

  • Federal: $24.95 to $64.95. Free version available for simple returns only.

  • State: $29.95 to $44.95.

  • All filers get access to Xpert Assist for free until April 7.

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  • Federal: $39 to $119. Free version available for simple returns only.

  • State: $49 per state.

  • TurboTax Live packages offer review with a tax expert.

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  • Federal: $29.99 to $84.99. Free version available for simple returns only.

  • State: $36.99 per state.

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