Is sales tax reclaimable in the United States?

Our UK clients often ask if sales tax is reclaimable in the United States. The answer is no. The explanation stems from a fundamental difference in the way VAT and sales tax operate.

VAT is a tax assessed on the value added in each production stage of a good or service. Sales tax, in contrast, is intended to be assessed only against the final purchaser of a product. (Services are generally exempt from sales tax, although there are exceptions.) That’s why a business which purchases a product for resale, or which purchases raw materials for consumption in manufacturing, can typically avoid paying sales tax by presenting an exemption certificate to its seller.

VAT is reclaimable when the input VAT is greater than the output VAT. Because sales tax is not intended to be charged on inputs, the ability to reclaim tax paid on inputs is, in theory, not relevant. It is therefore not allowed.

Of course, the reality is that many businesses do pay sales tax on everything from office supplies to software subscriptions. It is worth noting, therefore, that there is a fundamental difference in the way that these taxes are posted in US and UK accounting systems. Because input VAT is potentially reclaimable, input VAT is tracked as an asset in UK accounting systems, separate from the relevant expense account. In the US, in contrast, the total cost of a good or service – including sales tax – is posted to the relevant expense account. Because US sales tax is not reclaimable, the tax is not separately tracked and does not appear on the balance sheet at all.