Menu Close

Blog post from December 3rd, 2020

Sales tax: what you need to know, benefits and tax rates

blank

Private consumers are likely to be more familiar with sales tax as “VAT,” because that is how it is declared on receipts and invoices to consumers. In fact, it is the same tax and has the same purpose. On the opposite side, there is also the input tax, which is irrelevant for consumers but all the more important for purely commercial transactions.

Table of contents

  1. Explanation and definition of sales tax
  2. Amount and tax rates
  3. Which tax rate applies when?
  4. Sales and input tax for companies and handling
  5. Declaration of input tax and input tax deduction
  6. Example for private and intra-commercial transactions
  7. Special regulations for abroad
  8. Special regulations regarding sales tax exemption
  9. Booking of sales tax

1. Explanation and definition of sales tax

Back to table of contents

The tax, which by no means only exists in Germany, is often colloquially referred to as a “consumption tax”, which already gives a good idea of its purpose. The state levies it on all types of consumer purchases; only very few products enjoy an exemption. Whenever a commercial person, for example a company or a dealer, sells a product, he must add sales tax to the net price. The recipient of the invoice then pays the gross price, which consists of the net price and sales tax/VAT.

The legal basis for this is provided by the Sales Tax Act with its §1 UStG. The paragraph states that all services and deliveries are subject to sales tax if the recipient pays a fee for them. The sales tax obligation therefore also applies to all companies based in Germany, although there is a special regulation for small businesses, which will be discussed in more detail later in this article. By the way, Germany is not alone with this tax. Consumption taxes are also levied in other countries, but have different names: for example “VAT” (value added tax) in the USA.

2. Amount and tax rates

Back to table of contents

At the time of this article, two tax rates exist:

– 7 % (reduced tax rate)
– 19 % (regular tax rate)

Furthermore, the tax rate was temporarily reduced to 16 % or 5 % in the second half of 2020. This reduction was a measure by the federal government to achieve a reduction in final prices, which was intended to stimulate consumption in times of the Covid-19 pandemic. The well-known tax rates are scheduled to apply again from January 2021.

For both tax rates, the net price is used as the assessment basis. For example, if the net price is 100 euros and the product or service is subject to the regular tax rate, 19 %, i.e. 19 euros, must be added to this. When calculating back from the gross price to the net price, it should be noted that the gross price then corresponds to 119 %.

3. Which tax rate applies when?

Back to table of contents

Basically, the rate of 19 % always applies. This only does not apply if goods and services are specifically listed in Section 12 UStG - the overview for goods and services for which a reduced tax rate is levied. The reduced tax rate covers many products that the state considers essential, such as various foods or sales generated from livestock and plant breeding. Some cultural activities, such as theater visits and museum tickets, are also subject to the tax rate of 7 %. The situation is identical for some dental services. Medical treatments, for example from a family doctor, are completely exempt from tax because they are not assessed as consumption.

4. Sales and input tax for companies and handling

Back to table of contents

The tax collected, regardless of whether it is 7 % or 19 %, must be shown transparently in the invoice. Section 14 UStG provides the legal basis for this. The VAT ID number must also be on the invoice. be included, which has no meaning for private consumers, but is relevant in the trade in goods and services between two commercially active people.

A special feature should be explained at this point. Commercially active people are not specifically subject to VAT or consumption tax, as the transfer of services and products in a commercial context is not considered consumption. In practice, this means that the company has to record the VAT on the invoice and the gross amount is also transferred, but the company only manages the VAT received temporarily and has to return it to the tax office at a later date - after it has been approved Input tax was offset.

5. Declaration of input tax and input tax deduction

Back to table of contents

The input tax affects the company that pays the invoice that another company issues. The VAT is on the invoice, but the company to be paid only interprets it temporarily. As part of the input tax deduction, the amount is offset against the specially issued invoices and the sales taxes accumulated there. If the VAT received predominates, it will be transferred to the tax office regularly, for example monthly or quarterly, and thus settled. If the input tax paid predominates, the company that paid in advance will receive a refund from the tax office.

In short, both sales tax and input tax are of little relevance for companies if they only act and provide services on an internal commercial basis. For both sides, the tax levied is merely a temporary expense or a temporary gain. Intra-commercial transactions are therefore only calculated using net prices. The sales tax or VAT only becomes relevant when setting prices when services and goods are marketed to private consumers, as they cannot reclaim the tax because their purchase is again classified as consumption.

6. Example of private and intra-commercial transactions

Back to table of contents

The following example serves to illustrate sales tax, input tax and VAT, which all describe the same money.

Retailer A buys electronics from supplier B for the net amount of 10,000 euros. As planned, supplier B charges sales tax of 19 %. The gross amount on the invoice is 11,900 euros, which dealer A also transfers.

Dealer A sells the purchased electronics to private consumers, each individual product is subject to VAT of 19 %. The total net sales amount to 20,000 euros. The dealer also received the 19 % VAT (3,800 euros) from private consumers, so he recorded a total of 23,800 euros. 

Dealer A now has the opportunity to offset sales and input tax. He is not allowed to keep the VAT received (3,800 euros), but must pay it to the tax office. However, he can reduce this amount by the input tax previously paid to the supplier (1,900 euros) and therefore only has to pay the difference of 1,900 euros. The profit therefore always arises exclusively from the net prices in the purchase and subsequent resale, as the retailer cannot view the VAT received as profit or additional margin.

In this example, the private consumer pays more than the pure net price (19 % more) and has no opportunity to offset or reduce this, since his purchase is considered consumption and the tax exists precisely to tax this. This is still advantageous for companies. For example, if they buy office equipment, they will receive it 19 % cheaper than private consumers, as only companies can carry out the billing, while private consumers pay the full gross price without later billing.

7. Special regulations for abroad

Back to table of contents

For transactions from other EU countries, regulations on intra-community acquisition apply. The company that makes the purchase is obliged to determine and pay the sales tax independently. For transactions outside the EU zone, import sales tax, which is levied by the responsible customs authority, applies. The supplier from abroad does not charge sales tax, but it is charged to the buyer. In return, deliveries outside the EU are also exempt from VAT for the German supplier. 

8. Special regulations regarding sales tax exemption

Back to table of contents

Small businesses are exempt from sales tax. However, small businesses must indicate this on their invoice. Small businesses are not allowed to generate more than 22,000 euros gross in the previous year and probably not more than 50,000 euros gross in subsequent years. Small businesses benefit from simplified accounting, but they also have no opportunity to deduct input tax, which can have a massive, lasting impact. In return, products and services can be provided without the VAT surcharge of 19 %, which means that small businesses can set attractive end consumer prices.

In addition, some professional groups are completely exempt from VAT collection:

- Doctors
- Dentists
– alternative practitioner
– similar medical activities
– Teachers at universities and private schools

9. Recording of sales tax

Back to table of contents

Sales and input taxes must be recorded separately. Gross prices must also be divided into net prices and their respective taxes, i.e. sales or input tax. As part of double-entry bookkeeping, the respective amounts are recorded in specially set up accounts within the accounting department. Sales tax and input tax are in separate accounts. A division is also necessary outside of double-entry bookkeeping if the EÜR income surplus accounting is used. 

Outstanding differences are then regularly settled with the responsible tax office. For larger sales, payment is usually made monthly; for moderate sales, payment every quarter is also conceivable. Depending on whether the sales or input tax side predominates, the business person compensates for excess sales tax by paying the tax office or receives a refund in his account if there is excess input tax. The advance sales tax return is used for this purpose and must be submitted on time and can be transmitted digitally.

Latest posts

Product updates March and April

16.04.2024

The path to paperless accounting with sevDesk and GetMyInvoices 

29.02.2024

Product updates in January and February

22.02.2024

Product updates in November

19.12.2023

Product updates in October

15.11.2023