Sales tax

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 to the price at the point of sale.

Most sales taxes are collected from the buyer by the seller, who remits the tax to a government agency. 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.

Types of Sales Tax

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, 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 in another state and delivered to the purchaser by mail or common carrier. Use taxes are commonly imposed by states with a sales tax, but are difficult to enforce on consumers, except for large items such as automobiles and boats.

• 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 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 the highest VATs at 25%, although reduced rates are used in some cases, as for groceries, art, books and newspaper.

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

Until 2010, there had never been a federal sales tax in the United States; however, the 2010 health care reform law now imposes a 10% federal sales tax on indoor tanning services.

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.

Sales tax planning

Businesses can reduce the impact of sales tax for themselves and their customers by proactively planning for the tax consequences of all activities. Sales tax planning should include the following:

• Designing invoices to reduce the taxable portion of a sale transaction. In Maryland, for example, a delivery charge is exempt from the tax when stated separately from handling and other taxable charges.
• New facilities. Jurisdictions with no sales tax or broad exemptions for certain types of business operations would be an obvious consideration in selecting a site for a new manufacturing plant, warehouse or administrative office.
• Delivery location. For a businesses operating in several jurisdictions, choosing the best location in which to take delivery can reduce or eliminate the sales tax liability. This is particularly important for an item to be sold or used in another jurisdiction with a lower tax rate or an exemption for that item. Businesses should consider whether a temporary storage exemption applies to merchandise initially accepted in a jurisdiction with a higher tax rate.
• Review of company purchases to determine whether tax was paid in error for equipment and supplies qualifying for exemptions, especially in jurisdictions with broad manufacturing exemptions. Some jurisdictions allow refunds as long as three or even four years after the tax was paid.
• Periodic review of record-keeping procedures related to sales and use tax. Proper supporting detail, including exemption and resale certificates, invoices and other records must be available to defend the company in the event of a sales and use tax audit. Without proper documentation, a seller can be held liable for tax not collected from a buyer.

See also

• Sales taxes in Canada
• Sales taxes in the United States
• Goods and Services Tax (Australia)
• Sales Tax Audit
• Consumption tax
• Excise tax
• Turnover tax
• Value added tax
• FairTax