Harold Hallikainen wrote:

> I assume a reseller deducts only the VAT paid on items he/she actually
> resells. Do inventory control systems maintain a separate field for the
> VAT portion of the cost of goods sold? Seems like there'd be a danger of
> someone deducting "paid VAT" on stuff that was used instead of resold
> (there's a similar problem with sales tax in buying stuff for resale, then
> using it instead).

No. See, here you are trying to apply the confusion created by the sales
tax system to the VAT system. (BTW, I prefer the name VAT to GST, because
VAT describes it better what it actually is.)

The logic is this: Say both company A and company B produce the same
product, and it costs them both 100 to make it. But company A buys 80 of
that in components that go in the product (sales tax exempt) and 20 of it
is in machine and consumable cost (where they pay sales tax on), whereas at
company B 20 of the 100 is components that go in the product (sales tax
exempt) and the other 80 are machine and consumable cost. 

The taxing situation WRT sales tax of both would be quite different, for no
apparent reason. In a VAT country, they are both treated the same:
/everything/ you buy is simply considered cost of doing business. (If it
isn't, it shouldn't appear in your accounting anyway.) With VAT, there is
no artificial fiscal difference created between items bought for resale and
bought for use. 

This difference between consumables and goods for resale is really a stupid
and arbitrary distinction... Is the solder in the boards you sell bought
for resale or for use? Am I not reselling at least partly my computer and
equipment time when developing professionally?


> As another poster pointed out, this DOES get interesting with interstate
> commerce since each state is responsible for sales tax. 

I have only VAT experience inside Germany, and there it is a federal tax. 

> In addition, a portion of the sales tax goes to the local governments who
> set the rate of their "add on" to the basic state tax. How does this
> work in VAT countries? 

I don't know any VAT country that has local VAT. Since it is a balance
system, there are a number of ways to implement something like this. The
easiest would probably be that a city declares that, say, 10% of all VAT
paid to the higher level (state or federal) gets paid to the city. This
would sort of "hide" the tax from the consumer (in the sense that it
doesn't appear as tax on the invoice), but that's already the case with
income tax and any number of other fees and taxes.

You could also increase the VAT rate (as it happens with sales tax), but
this then can get tricky, with the balance system, to track the exact
amount owed. Doesn't sound good to me, but I haven't thought it through,
from an accounting perspective. I'm a big fan of making taxes /simple/. IMO
the actual losses through unproductive work wasted on supposedly more
"just" taxes are higher than the perceived losses through the "injustices"
with simpler tax rules.

> Is VAT a national instead of state/local tax? 

Yes, mostly AFAIK.

> How does it apply on international sales? 

Wouter explained that. Let me add that when I lived in Germany and bought
something from overseas (a country with which no VAT treaty exists), I had
to pay VAT on the item bought -- collected by the customs agency (instead
of by the seller).

Gerhard

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