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A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale. A portion of the sale may be exempt from the calculation of tax, because sales tax laws usually contain a list of exemptions. Laws governing the tax may require it to be included in the price (tax-inclusive) or added at the point of sale (tax-exclusive).

Most sales taxes are collected from the buyer by the seller, who remits the tax to a government agency. The economic burden of the tax usually falls on the purchaser, but in some circumstances may fall on the seller. Sales taxes are commonly charged on sales of goods, but many sales taxes are also charged on sales of services. Ideally, a sales tax would have a high compliance rate, be difficult to avoid, and be simple to calculate and collect.

Contents

Types

A conventional or retail sales tax is charged only on the sale of an item to its final end user. To achieve this, a purchaser who is not an end user is usually required to provide the seller with a "resale certificate," which states that the seller is purchasing an item to resell it. The tax is charged on each item sold to purchasers who do not provide such a certificate.

Other types of sales taxes include the following:

  • 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.[1]
  • 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.
  • 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.
  • Use tax, imposed directly on the consumer of goods purchased without sales tax, generally items items purchased from a vendor in another state and delivered to the purchaser by mail or common carrier. Use taxes are commonly imposed by states in the United States, but are difficult to enforce on consumers, except for large items such as automobiles and boats.

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 the highest VATs at 25%[2][3], although reduced rates are used in some cases, as for groceries and newspaper.[4]

In some countries, 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%).[5] For Baton Rouge, Louisiana, the tax is 9%, consisting of 4% state and 5% local rate.[6] However, there is no general nationwide sales tax in the United States.

The trend has been for conventional sales taxes to be replaced by more broadly based value added taxes, and the United States is now one of the few countries to retain conventional sales taxes. VAT has been adopted by the European Union, Mexico, Australia, Canada (Goods and Services Tax) and many other countries. Most provinces in Canada impose a sales tax alongside the federal GST.

Effects

Sales taxes are considered regressive; that is, the tax imposes a greater burden on low-income families than wealthy families. This is an effect of spending; lower-income families spend more and save less of their income. The regressive effect can be mitigated with exemptions for "necessary" items, such as food, clothing and medicines.[7]

Sales tax planning

In many jurisdictions, there are opportunities for businesses to proactively plan and structure significant transactions to reduce future tax burdens. Sales tax planning may include the following:

  • Determination of ways to legally reduce the amount of tax due on a transaction. For instance, how a company structures its invoices can affect the taxability of the entire transaction. Each jurisdiction has different rules for applying sales tax. Some jurisdictions' laws are more advantageous to a business taxpayer for certain types of transactions. If a business operates in several jurisdictions, choosing the best one in which to take delivery can reduce or eliminate the sales tax liability.
  • Review of company purchases to determine whether tax was paid in error to purchase assets qualifying for exemptions.
  • Periodic review of procedures relating to sales & use tax data gathering and retention. Proper supporting detail, including exemption and resale certificates, and invoices and other records must be available to defend the company in the event of a sales and use tax audit.

See also

References

  1. ^ Chamberlain, Andrew; Fleenor, Patrick (2006-12-01). "Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes". Tax Foundation. http://www.taxfoundation.org/news/show/2061.html. Retrieved 2007-02-21.  
  2. ^ VAT Rates Applied in the Member States of the European Community European Commission Taxation and Customs Union (2009-7-1), retrieved 2009-12-7
  3. ^ Guide to Value Added Tax in Norway Skatteetaten (2009-4-7), retrieved 2009-12-7
  4. ^ The VAT Brouchure (9th ed.), Swedish Tax Agency, May 2008, p. 6, SKV 552B, http://www.skatteverket.se/download/18.2132aba31199fa6713e800013050/552B09.pdf, retrieved 30 July 2008  
  5. ^ Tax Rate Finder Illinois Revenue official website, retrieved 2009-12-7
  6. ^ Sales and Use Tax Rates effective 7/1/2009 East Baton Rouge Parish, retrieved 2009-12-7
  7. ^ "Who Pays? A distributed analysis of the tax systems in all 50 states". The Institute on Taxation & Economic Policy. January 2003. http://www.itepnet.org/wp2000/text.pdf. Retrieved 2009-12-7.  
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