Regardless of whether it is food, clothing, painting or energy: sales tax is levied on almost all goods and services. It is calculated as a percentage of the net sales and, together with this, forms the gross price to be paid by the buyer. From a company perspective, sales tax is a payment on the added value that it generates in the value chain. That is why there is often talk of value added tax. The idea of a VAT goes back to the German industrialist Carl Friedrich von Siemens. As early as 1919 he developed the concept of net sales tax. It would be 30 years before France and the state of Michigan actually introduced sales tax. The tax now exists in almost every country in the world.
- As a result, while the company can claim the sales tax paid as input tax, the end consumer bears the entire tax burden.
- In the EU, the minimum amount of sales tax is regulated in the so-called Value Added Tax System Directive.
- The basic idea behind the reduced tax rate is to secure basic supplies for the population.
Calculate sales tax
How does sales tax work? An example: A furniture manufacturing company needs various raw materials to manufacture a sofa, which it purchases from a supplier. The material value is 100 euros. The company sells the finished piece of furniture at a net price of 500 euros. The buyer pays a tax of 19 percent (95 euros) on it. So the sofa goes over the counter at a price of 595 euros.
The company itself has created an added value of 400 euros in relation to the raw material. For this added value, the company has to pay a tax of 76 euros to the tax office. How does this value come about? Before forwarding it to the tax office, it deducts the VAT that it paid itself for the materials (19 percent of 100 euros = 19 euros) – the so-called input tax. The company transfers the remaining amount of 76 euros for the added value produced.
As a result, while the company can claim the sales tax paid as input tax, the end consumer bears the entire tax burden.
Sales tax in Germany and elsewhere
In the EU, the minimum amount of sales tax is regulated in the so-called Value Added Tax System Directive. The standard tax rate must be at least 15 percent and the reduced tax rate at least 5 percent. There is no upper limit. According to the regulations of the EU, products can also be completely exempt from VAT.
In Europe, Hungary levies the highest sales tax with 27 percent, followed by Denmark and Sweden with 25 percent each. Andorra residents (4 percent) have to pay one of the world’s lowest sales taxes.
Short for ST by abbreviationfinder, the sales tax rate in Germany is usually 19 percent. But no rule without exception. A reduced tax rate of 7 percent is levied on most food, printed matter, medical aids, tickets for public transport, cultural events, etc. in this country.
The exceptions in the German VAT system
The basic idea behind the reduced tax rate is to secure basic supplies for the population. For this reason, the legislature has introduced subsidies in the form of a reduced tax rate on basic food, sport, culture and also local public transport. But why are so many luxury items now part of the subsidized basic needs and many foods not? In Germany, the sales tax law regulates which products are taxed and how. Any product that falls into one of the 54 subsidized categories is subject to the reduced tax rate. In the case of all other products and services, customs or, alternatively, the tax courts decide.
This regulation makes it possible, for example, for dog biscuits to be taxed at 7 percent and children’s biscuits at 19 percent. Other hair-raising examples: gourmet products such as foie gras or quail eggs make up 7 percent of the list, baby food, medicines and mineral water make up 19 percent. Anyone who buys fruit, milk or wood chips pays 7 percent VAT at the checkout, those who choose fruit juice, soy milk or wood chips pay 19 percent. Critics are therefore calling for an end to this mischief of arbitrariness and for standardizing VAT regulations. A corresponding reform of the value added tax is under discussion at the federal level. At EU level, there are even considerations to restrict reduced VAT rates or to eliminate them altogether.