Business Guide: Revenue and Input Tax Explained Simply

Buying and selling goods or services is a routine process for everyone, and the financial details are outlined in an invoice. Invoices usually include a tax that you must pay in addition to the actual cost of the service. For a consumer, this is fairly unremarkable. After all, the so-called value-added tax is usually “automatically” included in the listed price. Our tax advisors’ experience shows that, for business owners, however, a close look at sales tax, value-added tax, and input tax is very important. Start-up entrepreneurs, in particular, should address this topic early on. To ensure that you, too, will know exactly what these terms mean in the future, our tax advisors in Oberhausen and Düsseldorf have created a simple overview for you.

Sales tax, input tax, and value-added tax? What’s the difference?

Obviously, these terms are related and are therefore often confused. Why do companies collect sales tax but claim “input tax”? And why do consumers pay a value-added tax rate when companies talk about sales tax? Our tax advisors know the answers to these questions.

Sales Tax

Sales tax (USt.) is regulated by the Sales Tax Act. Sales tax must be added to almost all products and services sold in Germany. Companies are currently required to charge 19% sales tax on their products and services. Exceptions apply to certain goods and services, such as books or food. The reduced tax rate is 7%. Our tax experts explain which products are covered by these exceptions later in this text.

Not every business owner is required to report sales tax. Exceptions apply, for example, to doctors or landlords. The small business exemption can be particularly important for new entrepreneurs. You can learn more about this topic in our blog post on small businesses.

Sales tax is always levied when an exchange of goods or services takes place. It is therefore a so-called “transaction tax.” However, the business does not permanently retain the sales tax; instead, it must be remitted to the tax office. Thus, the business is the tax debtor to the tax office. The costs, however, are passed on to consumers. This makes the consumer the tax bearer.

Difference Between Value-Added Tax and Sales Tax

Now that you know how sales tax is defined, you may be wondering about the distinction. As tax advisors in Düsseldorf and Oberhausen, we are, of course, more than happy to clarify this for you. The definition mentioned bears a striking resemblance to the value-added tax you are familiar with—and that is no surprise, since in Germany the two terms are often used interchangeably.

Value-added tax is the term used when dealing with end consumers. Therefore, value-added tax (VAT) is shown on receipts and other documents. However, what is actually meant is the sales tax explained above.

Sales tax at 7% or 19%?

As you already know, the standard rate of 19% sales tax applies to most products and services. However, there are also exceptions with a reduced tax rate of 7%. This applies, for example, to:

• Take-out food (food consumed on-site is taxed at 19%)
• Food
• Copyright-protected products (books, images, texts, newspaper articles, brochures, etc.)
• Art objects
• One-time performances (theater performances, tickets, circus shows, etc.)
• Hotel accommodations
• Public transportation tickets

There are many complex exceptions to the reduced tax rates. Therefore, as a business owner, you should carefully verify whether your product or service is actually subject to the reduced tax rate. A detailed list can be found in Appendix 2 of the Value-Added Tax Act. If there are any uncertainties, consult your tax advisor.

What is input tax?

Of course, it is not only end consumers, as customers of businesses, who pay sales tax. The business itself must also pay sales tax, for example, when purchasing raw materials for products. When a carpenter buys wood for his production, sales tax is shown on the supplier’s invoice as usual and must be paid. However, businesses enjoy a significant advantage over end consumers, as these amounts can be claimed by the business as input tax. The carpenter may therefore reclaim this sales tax as input tax from the tax office. This is referred to as an input tax deduction.

Input tax is therefore nothing more than sales tax that a business must “advance,” but ultimately receives back from the tax office.

Calculation Example

To help you understand more than just the theory, our tax advisors in Düsseldorf and Oberhausen have put together a simple example for you.

Suppose your e-commerce company purchases goods with a net value of 20,000 euros. This results in the following VAT calculation:

• €20,000 (net) × 1.19 (19% VAT) = €23,800 (gross)
• €23,800 – €20,000 = €3,800 VAT

Your company must therefore first pay the invoice for €23,800. This includes €3,800 in sales tax. However, you can claim this sales tax as input tax and have it refunded by the tax office. This is therefore a transitory item that has no impact on your company’s profit.

In the next step, you process these goods further and plan to resell them for a net price of €25,000. Of course, sales tax or value-added tax must also be added:

• €25,000 (net) × 1.19 (19% VAT) = €29,750 (gross)
• €29,750 – €25,000 = €4,750 VAT

Your company therefore sells the goods for €29,750 including VAT. The end consumer is charged €4,750 in sales tax.

Your company must remit the sales tax to the tax office. However, prior to this, the €4,750 in sales tax is offset against the €3,800 input tax refund due as part of the advance sales tax return.

• €4,750 – €3,800 = €950

You must remit the difference between the “advanced” input tax and the collected sales tax to the tax office. In this case, you therefore only need to transfer €950 to the tax office.

The Advance VAT Return

The final paragraph of the calculation example mentions the advance VAT return. You must submit this to the tax office at regular intervals. As part of the advance return, you must report the VAT contributions and input tax contributions to the tax office. The tax office determines the tax liability, as in our example.

Depending on the amount of revenue and expenses during the respective period, the company either receives a refund (input tax surplus) or must pay an amount (VAT liability):

• Input tax surplus = Input tax amount > Output tax amount
• VAT liability = Input tax amount < Output tax amount

You now have an initial overview of the topic and can distinguish between the terms. While the subject of sales tax remains a routine yet sometimes complex matter, it should not be neglected. Our tax advisors therefore recommend that every business owner thoroughly familiarize themselves with the subject to avoid mistakes.

To ensure you don’t receive any unpleasant correspondence from the tax office in the future because something went wrong, you should always consult an expert. As tax advisors in Düsseldorf and Oberhausen, we are your partner for all questions related to sales tax. Our team also specializes in advising new business owners. Contact us now!