Sales Tax - Types

Types

A conventional or retail sales tax is only levied on the sale of a good to its final end user. Sales to businesses who later resell the goods are not charged the tax. A purchaser who is not an end user is usually issued a "resale certificate" by the taxing authority and required to provide the certificate (or its ID number) to a seller at the point of purchase, along with a statement that the item is for resale. The tax is otherwise charged on each item sold to purchasers who do not provide such a certificate and who are under the jurisdiction of the taxing authority.


Other types of sales taxes, or similar taxes, include:

  • Gross receipts taxes, levied on all sales of a business. This tax has been criticized for its "cascading" or "pyramiding" effect, in which an item is taxed more than once as it makes its way from production to final retail sale.
  • Excise taxes, applied to a narrow range of products, such as gasoline or alcohol, usually imposed on the producer or wholesaler rather than the retail seller.
  • Use tax, imposed directly on the consumer of goods purchased without sales tax, generally items purchased from a vendor who is not under the jurisdiction of the taxing authority (e.g., a vendor in another state). Use taxes are commonly imposed by states with a sales tax, but are usually only enforced for large items such as automobiles and boats.
  • Securities turnover excise tax, a tax on the trade of securities.
  • Value added taxes, in which tax is charged on all sales, thus avoiding the need for a system of resale certificates. Tax cascading is avoided by applying the tax only to the difference ("value added") between the price paid by the first purchaser and the price paid by each subsequent purchaser of the same item.
  • FairTax, a proposed federal sales tax, intended to replace the U.S. federal income tax.
  • Turnover tax, similar to a sales tax, but applied to intermediate and possibly capital goods as an indirect tax.

Most countries in the world have sales taxes or value-added taxes at all or several of the national, state, county or city government levels. Countries in Western Europe, especially in Scandinavia have some of the world's highest valued-added taxes. Norway, Denmark and Sweden have higher VATs at 25%, Hungary has the highest at 27%, although reduced rates are used in some cases, as for groceries, art, books and newspapers.

In some jurisdictions of the United States, there are multiple levels of government which each impose a sales tax. For example, sales tax in Chicago (Cook County), IL is 10.25%—consisting of 6.25% state, 1.25% city, 1.75% county and 1% regional transportation authority. Chicago also has the Metropolitan Pier and Exposition Authority tax on food and beverage of 1% (which means eating out is taxed at 11.25%).

For Baton Rouge, Louisiana, the tax is 9%, consisting of 4% state and 5% local rate.

In California, sales taxes are made up of various state, county and city taxes. The state tax is "imposed upon all retailers" for the "privilege of selling tangible personal property at retail." Strictly speaking, only the retailer is responsible for the payment of the tax; when a retailer adds this tax to the purchase price, the consumer is merely reimbursing the retailer by contractual agreement. When consumers purchase goods from out-of-state (in which case the seller owes no tax to California) the consumer is required to pay a "use tax" which is identical to the sales tax. Use tax is levied upon the "storage, use, or other consumption in this state of tangible personal property." Consumers are responsible for declaring these purchases in the same filing as their annual state income tax, but it is rare for them to do so. An exception is out of state purchase of automobiles, in which case use tax is collected by the state as part of registering the vehicle in California.

The trend has been for conventional sales taxes to be replaced by more broadly based value added taxes. Value added taxes provide an estimated 20 percent of worldwide tax revenue and have been adopted by more than 140 countries. The United States is now one of the few countries to retain conventional sales taxes.

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