A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually, laws allow the seller to collect funds for the tax from the consumer at the point of purchase.
When a tax on goods or services is paid to a governing body directly by a consumer, it is usually called a use tax. Often, laws provide for the exemption of certain goods or services from sales and use tax, such as food, education, and medicines. A value-added tax (VAT) collected on goods and services is related to a sales tax. See Comparison with sales tax for key differences.
Types
Conventional or retail sales tax is levied on the sale of a good to its final end-user and is charged every time that item is sold retail. Sales to businesses that 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 without such a certificate and who are under the jurisdiction of the taxing authority.Purchases for Resale Maryland State Comptroller's website. Retrieved 2010-05-19
Other types of sales taxes, or similar taxes: Manufacturers' sales tax, a tax on sales of tangible personal property by manufacturers and producers Wholesale sales tax, a tax on sales of wholesale of tangible personal property when in a form packaged and labeled ready for shipment or delivery to final users and consumers Retail sales tax, a tax on sales of retail of tangible personal property to final consumers and industrial usersManufacturers," wholesale and retail sale taxes Gross receipts taxes, levied on all sales of a business. They have been criticized for their "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 on the retail seller. Use tax, imposed directly on the consumer of goods purchased without sales tax, generally items purchased from a vendor not under the jurisdiction of the taxing authority (such as a vendor in another state). Use taxes are commonly imposed by states with a sales tax but are usually enforced only for large items such as automobiles and boats. Securities turnover excise tax, a tax on the trade of securities. Value added tax (VAT), 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 US federal income tax. Turnover tax, similar to a sales tax, but applied to intermediate and possibly capital goods as an indirect tax.
Implementation 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%VAT Rates Applied in the Member States of the European Community European Commission Taxation and Customs Union (2009-7-1), retrieved 2009-12-7Guide to Value Added Tax in Norway Skatteetaten (2009-4-7), retrieved 2009-12-7 although reduced rates are used in some cases, as for groceries, art, books and newspapers.
Globally, conventional sales taxes are increasingly being replaced by value-added taxes (VAT), which now account for approximately 20% of worldwide tax revenue. Over 140 countries have adopted VAT systems, leaving the United States as one of the few nations that continues to utilize a conventional sales tax model.
How sales taxes work across the U.S. involves 45 states that impose a statewide sales tax. Additionally, 38 states allow local sales taxes, which can significantly increase the total rate. Even states with moderate statewide rates can have high combined state and local rates. 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), Illinois 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 dining out is taxed at 11.25%).Tax Rate Finder Illinois Revenue official website, retrieved 2009-12-7 In Baton Rouge, Louisiana, the tax is 9.45%, which is 4.45% state & 5% local.Sales and Use Tax Rates effective 7/1/2009 East Baton Rouge Parish, retrieved 2009-12-7 In Los Angeles it is 9.5%, which is 7.25% state & 2.25% county.
Sales and use taxes in California 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" 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. Then, use tax is collected by the state as part of registering the vehicle in California.
Electronic commerce Sales tax on online purchasers operates in a different manner. Generally, there are four types of electronic commerce: intermediaries, retail, business-to-business and media, all of which are affected by consumer response to sales tax. However, while consumers are technically supposed to pay a sales tax when it comes to cross state border transactions, the practicality of enforcing it is impossible. As a result, online retail stores have had a distinct advantage in that they do not have to charge a sales tax. That has led many economists to examine consumer sensitivity when it comes to sales taxes. While some researchers have concluded a high elasticity of online purchase probability with respect to sales tax at around 2.3, others have found smaller figures of around 0.5. That means that enforcing an online sales tax would have negligible effects on aggregate sales.
Effects Economists at the Organisation for Economic Co-operation and Development studied the effects of various types of taxes on the economic growth of developed nations within the OECD and found that sales taxes are one of the least harmful taxes for growth.
Because the rate of a sales tax does not change based on a person's income or wealth, sales taxes are generally considered regressive. However, it has been suggested that any regressive effect of a sales tax could be mitigated, e.g., by excluding rent, or by exempting "necessary" items, such as food, clothing and medicines. Investopedia defines a regressive tax as "[a] tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder".
Effects on local economies
Higher sales taxes have been shown to have many different effects on local economies. With higher taxes, more consumers are starting to reconsider where they shop, according to a study conducted in Minnesota and Wisconsin, where the sales tax was raised on cigarettes. Effects of higher sales tax were not shown immediately in sales, but about six months after the taxes were raised. High sales taxes can be used to relieve property taxes but only when property taxes are lowered subsequently. Studies that have shown this correlation were conducted in Georgia by cities raising sales tax and lowering property taxes. To combat sales loss, a city must be able to import consumers to buy goods locally. If local sales taxes are too high, consumers will travel to other areas to purchase goods.
Enforcement of tax on remote sales In the United States, every state with a sales tax law has a use tax component in that law applying to purchases from out-of-state mail order, catalog and e-commerce vendors, a category also known as "remote sales". As e-commerce sales have grown in recent years, noncompliance with use tax has had a growing impact on state revenues. The Congressional Budget Office estimated that uncollected use taxes on remote sales in 2003 could be as high as $20.4 billion. Uncollected use tax on remote sales was projected to run as high as $54.8 billion for 2011.
Enforcement of the tax on remote sales, however, is difficult. Unless the vendor has a physical location, or nexus, within a state, the vendor cannot be required to collect tax for that state. This limitation was defined as part of the Dormant Commerce Clause by the Supreme Court in the 1967 decision on National Bellas Hess v. Illinois. An attempt to require a Delaware e-commerce vendor to collect North Dakota tax was overturned by the court in the 1992 decision on Quill Corp. v. North Dakota. A number of observers and commentators have argued, so far unsuccessfully, for a Congressional adoption of this physical presence nexus test.See, for example, Sidney S. Silhan, If It Ain't Broke Don't Fix It: An Argument for the Codification of the Quill Standard for Taxing Internet Commerce 76 Chi. - Kent. L. Rev. 671 (2000), setting forth reasons for maintaining the existing standard.
The Internet Tax Freedom Act of 1998 established a commission to study the possibility of internet taxation, but the commission did not make any formal recommendations. In a report issued in 2003, the Congressional Budget Office warned of the economic burden of a "multiplicity of tax systems, particularly for smaller firms".
In an effort to reduce the burden of compliance with the tax laws of multiple jurisdictions, the Streamlined Sales Tax Project was organized in March 2000. Cooperative efforts in this project by 44 state governments and the District of Columbia eventually produced the Streamlined Sales and Use Tax Agreement in 2010. This agreement establishes standards necessary for simplified and uniform sales tax laws. As of December 2010, 24 states had passed legislation conforming with the agreement. Whether the Streamlined Sales Tax can actually be applied to remote sales ultimately depends upon Congressional support, because the 1992 Quill v. North Dakota decision determined that only the U.S. Congress has the authority to enact interstate taxes.
Effect of electronic commerce