What Is Sales Tax (and Its Cousins)?
When you sell goods or services, many governments require you to collect tax from your customers and pass it along to the tax authority. This tax goes by different names depending on where you are:
- Sales Tax — common in the United States, applied at the point of sale
- GST (Goods and Services Tax) — used in Australia, New Zealand, Canada, India, Singapore, and others
- VAT (Value Added Tax) — used in the UK, EU countries, and many others worldwide
While the mechanics differ slightly, the core idea is the same: you collect tax from buyers and remit it to the government. You’re essentially acting as a collection agent.
How It Works in Practice
Registration
Most countries have a registration threshold — a revenue amount below which you don’t need to charge sales tax. Once your business revenue exceeds that threshold, you must register, start charging tax, and file returns.
Check your local threshold. In some places it’s quite low; in others, you have more room before registration kicks in. Some businesses choose to register voluntarily even below the threshold.
Charging Tax
Once registered, you add the applicable tax rate to your sales. Rates vary by jurisdiction and sometimes by product or service type. Some items may be tax-exempt or zero-rated.
Claiming Credits (GST/VAT)
Under GST and VAT systems, you can typically claim back the tax you’ve paid on business purchases. This is called an input tax credit.
Example: You charge $100 + $10 GST on a sale. You also paid $50 + $5 GST on supplies. You remit the difference: $10 - $5 = $5 to the tax authority.
Sales tax in the US generally doesn’t work this way — it’s only collected on final sales to consumers.
Tax-Inclusive vs Tax-Exclusive Pricing
This is a common source of confusion:
Tax-Exclusive
The price shown to the customer doesn’t include tax. Tax is added on top.
- Product price: $100
- Tax (10%): $10
- Customer pays: $110
Common in the US and in business-to-business transactions.
Tax-Inclusive
The price shown already includes tax. The customer pays the displayed price.
- Product price: $110 (includes $10 tax)
- Customer pays: $110
Common in Australia, the UK, and EU for consumer-facing businesses.
Know which method is required or expected in your market. Getting this wrong can mean you’re either overcharging customers or short-changing the tax authority.
Filing and Remitting
Filing Schedule
Depending on your jurisdiction and revenue, you’ll file returns:
- Monthly — for larger businesses
- Quarterly — the most common for small businesses
- Annually — for very small businesses in some jurisdictions
What You Report
- Total sales for the period
- Tax collected from customers
- Tax paid on business purchases (for GST/VAT credit claims)
- Net amount to remit (or refund to claim)
Keep It Separate
Set aside the tax you collect in a separate account or mental bucket. That money isn’t yours — it belongs to the tax authority. Spending it is one of the most common cash flow traps for small businesses.
Tips for Staying on Top of It
- Set the right tax rates in your invoicing system. Fastbooks lets you configure tax rates so every invoice is correct automatically.
- Keep accurate records. Every sale and purchase needs a proper tax entry.
- File on time. Late filing often comes with penalties, even if you owe nothing.
- Review regularly. Check that your tax collected matches what your books say. Catch discrepancies early.
- Ask for help. If you operate across borders or jurisdictions, get professional advice. Multi-jurisdiction tax gets complex quickly.