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A sales tax is a
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
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 A use tax is a type of tax levied in the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. ...
. 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 A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end ...
(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 Final, Finals or The Final may refer to: *Final (competition), the last or championship round of a sporting competition, match, game, or other contest which decides a winner for an event ** Another term for playoffs, describing a sequence of cont ...
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 users * 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 tax file:Lincoln Beer Stamp 1871.JPG, upright=1.2, 1871 U.S. Revenue stamp for 1/6 barrel of beer. Brewers would receive the stamp sheets, cut them into individual stamps, cancel them, and paste them over the Bunghole, bung of the beer barrel so when ...
es, 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 A use tax is a type of tax levied in the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. ...
, 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 A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end ...
(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 FairTax was a flat tax, single rate tax proposal in 2005, 2008 and 2009 in the United States that includes complete dismantling of the Internal Revenue Service. The proposal would eliminate all Income tax in the United States, federal income ta ...
, 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 An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or value added tax, goods and services tax (GST), excise, consumption tax, tariff) is a tax that is levied upon goods and services before they reach the customer who ultimate ...
. 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 Western Europe is the western region of Europe. The region's countries and territories vary depending on context. The concept of "the West" appeared in Europe in juxtaposition to "the East" and originally applied to the ancient Mediterranean ...

Western Europe
, especially in
Scandinavia Scandinavia; Sámi languages: /. ( ) is a subregion#Europe, subregion in Northern Europe, with strong historical, cultural, and linguistic ties between its constituent peoples. In English usage, ''Scandinavia'' most commonly refers to Denmark, ...

Scandinavia
, have some of the world's highest valued-added taxes.
Norway Norway, officially the Kingdom of Norway, is a Nordic countries, Nordic country in Northern Europe, the mainland territory of which comprises the western and northernmost portion of the Scandinavian Peninsula. The remote Arctic island of ...

Norway
,
Denmark ) , song = ( en, "King Christian stood by the lofty mast") , song_type = National and royal anthem , image_map = EU-Denmark.svg , map_caption = , subdivision_type = Sovereign state , subdivision_name = Danish Realm, Kingdom of Denmark ...

Denmark
and
Sweden Sweden, formally the Kingdom of Sweden,The United Nations Group of Experts on Geographical Names states that the country's formal name is the Kingdom of SwedenUNGEGN World Geographical Names, Sweden./ref> is a Nordic countries, Nordic c ...

Sweden
have higher VATs at 25%,
Hungary Hungary ( hu, Magyarország ) is a landlocked country in Central Europe. Spanning of the Pannonian Basin, Carpathian Basin, it is bordered by Slovakia to the north, Ukraine to the northeast, Romania to the east and southeast, Serbia to the ...

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 A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government ...

government
which each impose a sales tax. For example, sales tax in
Chicago (''City in a Garden''); I Will , image_map = , map_caption = Interactive Map of Chicago , coordinates = , coordinates_footnotes = , subdivision_type = List of sovereign states, Count ...

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 Baton Rouge ( ; ) is a city in and the List of capitals in the United States, capital of the U.S. state of Louisiana. Located the eastern bank of the Mississippi River, it is the county seat, parish seat of East Baton Rouge Parish, Louisiana, E ...

Baton Rouge
,
Louisiana Louisiana , group=pronunciation (French: ''La Louisiane'') is a U.S. state, state in the Deep South and South Central United States, South Central regions of the United States. It is the List of U.S. states and territories by area, 20th-smal ...

Louisiana
, the tax is 9.45%, which is 4.45% state & 5% local. In
Los Angeles Los Angeles ( ; es, Los Ángeles, link=no , ), often referred to by its initials L.A., is the largest city in the state of California California is a U.S. state, state in the Western United States, located along the West Coast of ...
it is 9.5%, which is 7.25% state & 2.25% county. In
California California is a U.S. state, state in the Western United States, located along the West Coast of the United States, Pacific Coast. With nearly 39.2million residents across a total area of approximately , it is the List of states and territori ...

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" 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. 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% 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.


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, but 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 The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate ...

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 Investopedia is a financial media website headquartered in New York City. Founded in 1999, Investopedia provides investment dictionaries, advice, reviews, ratings, and comparisons of financial products such as securities accounts. Investopedia ha ...
defines a regressive tax as " 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 The Dormant Commerce Clause, or Negative Commerce Clause, in American constitutional law, is a legal doctrine A legal doctrine is a framework, set of rules, Procedural law, procedural steps, or Test (law), test, often established through preced ...
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. 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

Electronic commerce business can also be affected by consumption taxes. It can be separated into four categories: retail. intermediaries, business-to-business and media (Goldfarb 2008). These categories were affected varying degrees. The intermediaries was affected by the retail sales tax since it provide platforms for transitions between different parties (such as the Amazon marketplace). Business-to-Business transactions will be placed in different circumstances by whether the case will be taxed in the US. Electronic commerce goods are usually not taxed the same especially across the stats in the US. Different states has their own sales tax regulation, for example, some states use their standard sales taxes law for the digital goods, and some of the states have specific laws for them. It is difficult to enforce the taxes on electronic commerce especially for digital goods that trade across different countries. The effect that a sales tax has on consumer and producer behavior is rather large. The
price elasticity of demand A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elastici ...

price elasticity of demand
for online products is high, meaning that consumers are price sensitive and their demand will significantly change with small changes in price. This means that the tax burden lies primarily with the producer. To avoid altering demand, the producer will either avoid the tax if possible by relocating their fulfillment centers to areas without a high sales tax or they will internalize the cost of the sales tax by charging consumers the same price but paying for the tax from their profits.


History


Early examples

A tax imposed on the sale of goods is depicted on the walls of ancient Egyptian tombs, which have been dated as far back as 2000 BC. These paintings describe the collection of tax for specific commodities, such as cooking oil. Sales tax amounts, measured in drachmas at a rate of one percent, were recorded in a separate column of a record prepared for the auction of 16 slaves in
Piraeus Piraeus ( ; el, Πειραιάς ; grc, Πειραιεύς ) is a Port#Ancient Greece, port city within the Athens urban area ("Greater Athens"), in the Attica (region), Attica region of Greece. It is located southwest of Athens' city centr ...

Piraeus
, Greece in 415 BC. Nearby
Athens Athens ( ; el, Αθήνα, Athína ; grc, Ἀθῆναι, Athênai (pl.) ) is a coastal city in the Mediterranean and is both the capital and largest city of Greece. With a population close to four million, it is also the seventh largest c ...

Athens
collected duties on the import and export of commodities, recorded at a rate of two percent in 399 BC. At that period of time, Athens did not rely on government agencies to collect its taxes; the responsibility was delegated to the highest bidder, a practice known as
tax farming Farming or tax-farming is a technique of financial management in which the management of a variable revenue stream is assigned by contract, legal contract to a third party and the holder of the revenue stream receives fixed periodic rents from th ...
. The Roman emperor
Augustus Caesar Augustus (born Gaius Octavius; 23 September 63 BC – 19 August AD 14), also known as Octavian, was the first Roman emperor; he reigned from 27 BC until his death in AD 14. He is known for being the founder of the Roman Pri ...

Augustus
collected funds for his military
aerarium Aerarium, from ''aes'' (“bronze, money”) + -''ārium'' (“place for”), was the name given in Ancient Rome In modern historiography, ancient Rome refers to Roman civilisation from the founding of the city of Rome in the 8th century ...
in AD 6 with a one percent general sales tax, known as the '' centesima rerum venalium'' (hundredth of the value of everything sold). The Roman sales tax was later reduced to a half percent (''ducentesima'') by
Tiberius Tiberius Julius Caesar Augustus (; 16 November 42 BC – 16 March AD 37) was the second Roman emperor. He reigned from AD 14 until 37, succeeding his stepfather, the first Roman emperor Augustus. Tiberius was born in Rome in 42 BC. His father ...

Tiberius
, then abolished completely by
Caligula Gaius Julius Caesar Augustus Germanicus (31 August 12 – 24 January 41), better known by his nickname Caligula (), was the third Roman emperor, ruling from 37 until his assassination in 41. He was the son of the popular Roman general Germanicu ...

Caligula
.


In the United States

Although the United States government has never used a general sales tax, an excise tax on whiskey enacted in 1791 was one of its first fund raising efforts. The unpopularity of this tax with farmers on the western frontier led to the
Whiskey Rebellion The Whiskey Rebellion (also known as the Whiskey Insurrection) was a violent tax protest in the United States beginning in 1791 and ending in 1794 during the presidency of George Washington The presidency of George Washington began on ...
in 1794. Federal and state sales taxes in the United States remained selective, rather than general, through the 19th century. However, excise taxes were applied to so many specific commodities during the
Civil War A civil war or intrastate war is a war between organized groups within the same Sovereign state, state (or country). The aim of one side may be to take control of the country or a region, to achieve independence for a region, or to change go ...
that they functioned collectively as a general sales tax. The first broad-based, general sales taxes in the United States were enacted by Kentucky and Mississippi in 1930, although Kentucky repealed its sales tax in 1936. The federal government's per-gallon tax of gasoline (beginning at one cent per gallon in 1932) and per-package tax of cigarettes ($1.01 per package since 2009) are the most well-known current sales taxes administered by the federal government. Twenty-two other states began imposing general sales taxes later in the 1930s, followed by six in the 1940s and five in the 1950s. Kentucky re-enacted its sales tax law in 1960. Eleven more states enacted sales tax laws during the 1960s, with Vermont as the last in 1969. Five states currently do not have general sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. The 2010 health care reform law imposed a 10 percent federal sales tax on indoor tanning services, effective July 1, 2010. Unlike previous federal excise taxes, this tax is collected directly from the consumer by the seller and based on the sale price rather than a quantity. However, the new tax is ''selective'' rather than general, applying only to a specific service.


In Canada

Canada uses a value-added federal Goods and Services Tax with a rate of 5 percent, effective since January 1, 2008. Every province in Canada except Alberta has either a Provincial Sales Tax (PST) or the Harmonized Sales Tax (HST), which is a single, blended combination of the GST and PST.


Sales tax mitigation

Businesses can reduce the impact of sales tax for themselves and their customers by planning for the tax consequences of all activities. Sales tax reduction or mitigation strategies can include the following: * Designing invoices to reduce the taxable portion of a sale transaction. In
Maryland Maryland ( ) is a U.S. state, state in the Mid-Atlantic (United States), Mid-Atlantic region of the United States. It shares borders with Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; ...

Maryland
, for example, a delivery charge is exempt if it is 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. That 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. * 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 may be held liable for tax not collected from a buyer. In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, online retailers without physical presence in a given state may ship goods to customers there without collecting that state's sales tax because as of 2011, there is no federal sales tax. Amazon.com has been criticized for not collecting sales tax and has intentionally disaffiliated itself from businesses in certain states to continue doing so legally.


See also

* Consumption tax *
Excise tax file:Lincoln Beer Stamp 1871.JPG, upright=1.2, 1871 U.S. Revenue stamp for 1/6 barrel of beer. Brewers would receive the stamp sheets, cut them into individual stamps, cancel them, and paste them over the Bunghole, bung of the beer barrel so when ...
*
Goods and Services Tax (Australia) Goods and Services Tax (GST) in Australia Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With ...
* Sales Tax Audit * Sales and use taxes in California *
Sales taxes in Canada In Canada, there are two types of sales taxes levied. These are : *Provincial sales taxes (PST), levied by the Provinces and territories of Canada, provinces. *Goods and services tax (Canada), Goods and services tax (GST)/harmonized sales tax (H ...
*
Sales taxes in the United States Sales taxes in the United States are taxes placed on the sale or lease of goods and services in the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country ...
* Streamlined Sales Tax Project *
Value-added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end ...


References

{{DEFAULTSORT:Sales Tax Tax terms