[skybrian]

A VAT isn’t a sales tax though. I think you can subtract the cost of goods since they were already taxed? Compared with income tax, there are fewer expenses you can subtract from revenue, but there still are some.

But since prices will adjust, the question is really one of tax incidence. Who gets to raise prices to cover their taxes? And that’s complicated.

[thethimble]

You can subtract the cost of goods but you can’t subtract operating expenses like R&D.

[Hamuko]

I think you can subtract R&D costs somewhere else. At least I remember the accounting department being really picky about having accurate details on R&D hours.

[geysersam]

Don't know about US VAT system, but for VAT in Europe expenses such as salaries etc are deductable.

[edanm]

Not out of VAT though. They are deductible from your income, which is how you come up with how much profit you made (which is taxed).

With VAT, you can deduct from it all the other VAT that you paid. E.g. you bill someone 100 + 10% VAT for a total bill of 110. You receive 110. You are now supposed to pay that 10 VAT to the government. But before you pay it, you can subtract the VAT that you paid in the last month, so if you bought, say, scissors, that had a VAT of 2, and a pencil, with a VAT of 1, you have to pay a total VAT of 7 back to the government.

[skybrian]

I hadn’t heard of this. Where can I read more about it?

[mr_toad]

VAT is a sales tax, and you can only subtract the cost of goods sold, not any other expenses.

Not being able to subtract the cost of goods sold would be ludicrous and farcical.

[skybrian]

In the US, sales taxes don’t have any deductions. Some things aren’t taxed, though. It seems like an important difference.