What’s the difference between sales tax and VAT?
Sales tax is collected once, at the final sale to the end consumer. VAT is collected at every stage of the supply chain, from raw materials to manufacturing to the retail sale. To understand how that works without every business in the chain getting taxed on top of tax, you need two terms: output VAT and input VAT.
📤 Output VAT is the VAT a business charges on its own sales of goods and services. It's the closest equivalent to the sales tax a U.S. business collects at checkout, except output VAT applies at every stage of the supply chain rather than just the final sale.
📥 Input VAT is the VAT a business pays on its own purchases, expenses, and imports. It's the mirror image of output VAT: the tax a business pays going out the door on its costs, rather than the tax it collects coming in on its sales.
How the two net against each other
On each VAT return, a business nets its input VAT against its output VAT. If output VAT is higher, the business remits the difference to the tax authority. If input VAT is higher, meaning the business paid more VAT on its purchases and imports than it collected on its sales, it can typically claim a refund or credit.
This netting mechanism is what makes VAT a multi-stage tax without becoming a cascading one. A manufacturer pays input VAT on raw materials, charges output VAT when it sells to a distributor, and nets the two. The distributor does the same when it sells to a retailer. By the time the product reaches the end consumer, VAT has been collected at every stage, but no single business in the chain has been taxed on tax already paid.
⚠️ This concept doesn't exist in the U.S. sales tax model. Sales tax isn't collected at each stage of production the way VAT and GST are, so there's no equivalent netting step for a typical U.S. retailer. If your business operates in both worlds, that's often the biggest shift: U.S. sales tax is a single event, VAT is a running balance.
How Kintsugi handles input VAT
Kintsugi includes an Input VAT Credits field on EU country filings and EU-OSS filings, and the equivalent Input Tax Credits field on Canada filings. It's worth being precise about how this works, because it's easy to assume more automation than what's actually there.
The field is user-entered, not automatically calculated. You enter your input VAT credit amount (country-specific for EU-OSS filings), and Kintsugi nets that figure against the filing amount, showing the utilized and remaining balance on the filing details report. Kintsugi reduces your filing amount using the figure you supply. It doesn't track or automatically reclaim input VAT from your purchases.
In practice, that means your accounting or bookkeeping process is still responsible for calculating what input VAT you're entitled to credit. Kintsugi's role is to take that number and apply it correctly against what you owe, so it shows up accurately on your filing rather than getting lost in a spreadsheet.
Read more: Our guide to configuring VAT collection in Shopify
Why this matters if you're expanding internationally
Most of the world runs on VAT or GST rather than U.S.-style sales tax. If you're selling into the EU, UK, Canada, Australia, New Zealand, or Mexico, input and output VAT (or their GST equivalents) aren't optional vocabulary. They're the terms your registration paperwork, your filings, and your accountant will all use.
Getting comfortable with the distinction early also makes it easier to catch problems before they compound. A business that doesn't track input VAT credits carefully is either overpaying (by not claiming credits it's entitled to) or underpaying (by claiming credits it can't support). Neither is a good place to be when a filing gets reviewed.
If you're already filing VAT or GST returns through Kintsugi in the EU or Canada, the Input VAT Credits field is where that number lives. If you're new to VAT altogether, the short version is this: track what you paid, track what you charged, and let the difference tell you what you owe or what you're owed.
