“Value-added tax” and “sales tax” are often used interchangeably. Although individuals might not need to know the distinction, businesses need to see the difference – not least for accurate invoicing.

In this article, you will learn what VAT and sales tax are, how they have developed historically, and how they differ. We will also answer the question of which term to use on invoices.

What’s in this article?

• What is value-added tax (VAT)?
  
• What is sales tax?
  
• What is the difference between VAT and sales tax?
  
• Historical development of VAT in Germany
  
• Is VAT or sales tax indicated on an invoice?
  

What is value-added tax (VAT)?

Value-added tax, or VAT (Mehrwertsteuer), is an excise imposed on selling products and services. Unlike direct taxes, such as income taxes, sellers collect VAT indirectly by including it in the final price. Ultimately, the consumer bears this burden, which exclusively applies to a service’s acquisition or use. Businesses act as intermediaries, collecting the levy from their customers and remitting it to the tax authorities.

The term “value-added tax” refers to the underlying principle of incremental value: businesses are charged on the added value they create by selling their offerings. This is similar to VAT in English-speaking countries and can be freely translated as “value-added tax.” German tax law does not use this phrase; it refers to sales and input tax(Vorsteuer).

What is sales tax?

Although VAT refers to the entire process by which levies on the incremental value created by a product or service, sales tax refers only to the portion paid by businesses. All ventures in Germany that generate taxable transactions usually charge sales tax on their goods and services. The companies ultimately pass on this amount paid by the customers to the revenue office (Section 1, Paragraph 1, No. 1 of the German VAT Act [UStG]).

In Germany, the UStG sets out VAT provisions. The law regulates how to calculate, levy, and pay these obligations. The statutory tax rate is currently 19% (Section 12, Paragraph 1 of the UStG). For certain goods and services that the UStG classifies as important for daily needs, a reduced rate of 7% applies). These contain, among other things, basic foodstuffs and public transport. Additionally, some services are fully exempt from VAT, including educational offerings, insurance benefits, and aviation and marine sales. Please refer to our relevant article for more information on sales tax rates.

In principle, small enterprises are exempt from sales tax liability. According to Section 19 of the UStG, these companies fall below an annual revenue limit and voluntarily adopt the status of small enterprises. If this is the case, they waive standard taxation. The small enterprise limit changed in 2025: beginning this year, small businesses must have annual earnings of less than €25,000 net in the previous year and no more than €100,000 net in the ongoing one. The small business status expires once the earning limits are exceeded in the current fiscal cycle.

What is the difference between VAT and sales tax?

“Value-added tax” and “sales tax” are often used interchangeably. Strictly speaking, however, VAT is an umbrella term that includes transaction and input charges.

Input tax is the portion businesses pay suppliers when purchasing goods or services. They can deduct this as a business expense from their transactions, provided they are entitled to deduct input tax. They pay only the difference to the tax authorities. VAT is, therefore, a recurring item in the B2B sector: although private customers have to pay the sales tax themselves, companies can claim the levied amount paid as input tax.

An overview of VAT, sales tax, and input tax

• Individuals are responsible for the full amount of the sales tax, as they cannot claim an input tax deduction
  
• The VAT that businesses show on their invoices is called sales tax
  
• The VAT a business pays on purchases is called input tax
  
• As part of the VAT return, companies can deduct the input tax from the sales tax so that they only have to pay the difference to the revenue office
  

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Historical development of VAT in Germany

The history of German VAT begins in 1916. The German Empire needed additional revenue partly because of World War I. For this reason, a stamp duty of 0.1% was levied on the delivery of goods for the first time. Two years later, the UStG was introduced, the first general taxation of turnover in the movement of goods and services.

In 1919, the Reich Tax Code led to further reorganisation of these laws, introducing the all-phase gross turnover tax levied on every resale of goods. The accumulation of sales tax along the value chain led to high burdens for extended supply chains. Nevertheless, the all-phase gross sales tax lasted for almost 50 years. The initial rate evolved from 0.5% to 4%.

The sales tax system was converted to VAT in 1968 to avoid negative accumulation effects and financially relieve businesses. An all-phase net sales tax with input tax deduction was introduced. With this so-called VAT, only the value added by the business is subject to charges. This is, therefore, paid only once by those who receive the service – consumers pay the full amount. On the other hand, ventures entitled to input tax deduction can reclaim the VAT paid as such from the relevant office. The value-added principle is designed to balance income and expenses.

In 1968, the standard tax rate was 10%, and the reduced rate was 5%. Both rates increased several times over the next 30 years, reaching 16% and 7% respectively in 1998. The current level of 19% has been in effect since 2007, with the latest change in the law.

Is VAT or sales tax indicated on an invoice?

“Sales tax” needs to be shown on invoices. Although the difference in everyday life is often only linguistic, legal precision is recommended for companies. Using the correct term avoids potential complications. Strictly speaking, using the wrong terminology could prevent input tax deductions. In addition, the precise use of words signals professionalism and tax correctness to business partners and the authorities.

In practice, however, records are still issued with “VAT” instead of “sales tax”, and the tax authorities generally do not object. As a result, there is no need to correct invoices that have already been issued or submitted.

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