In the United States we have sales tax but the majority of countries worldwide have Value Added Tax or VAT, as it is commonly known.
In the United States you almost never pay the price you see advertised. When you get to the register they add sales tax. You always pay Federal sales tax. In most places you also pay a State sales tax. In some places you may also pay a City sales tax. Places that use VAT typically add the taxes into the advertised price so you pay exactly what the ticket says and no more.
So, what is the VAT? VAT is often referred to as a consumption tax. At each stage of production a tax is paid on the value of the product produced. In the end the consumer pays the total VAT on all phases of production. Vendors often get tax credits for the VAT that they paid to acquire goods and machinery.
Here’s a very simple example of how it works using a business that’s near and dear to my heart: a gelato stand.
Let’s assume that the VAT is 20%.
A paper cup supplier buys paper from a raw material supplier for $60. That means that the raw materials cost $50 and there was a VAT of $10. The raw material supplier owes the government $10.
The paper cup supplier then sells completed cups to the gelato maker for $120. That means that the cups cost $100 and there was a VAT of $20. If you thought that the paper cup supplier would now owe the government $20 then you’d be wrong! Remember, he paid $10 in VAT for the raw materials so he gets to deduct that amount and now only owes the government $10. That’s the “value added” part of the tax.
The gelato maker charges $4 for his product. That means that the VAT would be about $0.80. The total ingredients plus supplies (cups, spoons, napkins) cost him $2 per serving which means he already paid $0.40 in VAT per serving so he only owes the government $0.40 on each sale. The consumer winds up paying the entire VAT for all ingredients/supplies that went into the making of the gelato – the entire $0.80. For all the sales that month the gelato maker owes the government $500.
Unfortunately for the gelato maker his mixer broke down and he had to buy a new one. The new mixer cost $120 which breaks down to $100 for the mixer and $20 in VAT. The gelato maker gets to subtract that $20 from his tax bill and now only owes the government $480 for that month.
If you’re sharp you noticed that the government gets that $0.80 per serving of gelato twice – once from all of the suppliers in the chain and once again from the end consumer.
So why do I care about any of this? As a tourist you’re entitled to a refund on the VAT you paid for items such as clothes, gifts, leather goods, etc. The refund does not apply to food and hotel. Since the VAT in Italy is about 22% it’s as if everything you bought was on sale.
The procedure for getting a refund is more complicated than it needs to be. No doubt that is to discourage people from claiming their refunds, but don’t despair: if you spent a significant amount of money it is worthwhile. Just make sure you keep all your receipts and get the necessary documents from the retailers. Fill out the refund form ahead of time and when you get to the airport find the refund window. It’s likely to be an unpleasant experience.
Note: many retailers hate to fill out the paperwork and so will claim to have no idea of what you’re asking. If they do that be prepared to walk away. In most cases they will relent. If they don’t, they should lose the sale.
Good luck!