Sales tax

From New World Encyclopedia


A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. There are usually a list of exemptions. The tax can be included in the price (tax-inclusive) or added at the point of sale (tax-exclusive).

Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, and is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a gross receipts tax levied on the intermediate business who purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding," in which an item is taxed more than once as it makes its way from production to final retail sale.


Sales Taxes consist of two types: excise and general sales. The excise tax is placed on specified commodities and may be at specific rates or on an ad valorem basis. The general sales tax may be a manufacturers' excise tax, a retail sales tax paid by consumers, a "gross income" tax applied to sales of goods and provision of services, or a "gross sales" tax applied to all sales of manufacturers and merchants.


History of Sales Taxes ( in US and Canada )

During the nineteenth century several states adopted tax levies resembling sales taxes. The sales tax in its modern form was first adopted by West Virginia in a gross sales tax in 1921. During the 1930s, many states adopted the sales tax in its various forms as a replacement for the general property tax that had been their chief source of income.


The adoption of sales taxation slowed somewhat during the 1940s, but became more popular after World War II. At the end of 1971, forty-five states and the District of Columbia levied a sales tax in some form.


A corollary of the sales tax is the use tax. This is a charge levied on taxable items bought in a state other than the state of residence of the purchaser for the privilege of using the item in the state of residence. The rate structure is the same as that of the sales tax. Automotive vehicles are the most significant item in the yield of use taxes.


The rate structure used in the general sales tax is proportional; that is, the rate is constant as the base increases. For ease of administration and determination of the tax due, bracketing systems have been adopted by nearly all states. The rates in use in the mid-1970s varied from 2 percent to a high of 7 percent; 4 percent was the most common rate.

A combination of state and local rates may exceed 7 percent. A selective sales tax applying to a single commodity may have much higher rates. At the time of initial adoption of many of the sales taxes in the 1930s, tokens were used for the collection of the tax on small sales where the tax was less than one cent. Ohio used stamps to show that the tax had been collected. Nearly all these systems have been abandoned in favor of collection of the tax in full-cent increments.


Several forms of sales taxes have been used abroad. Canada has used a manufacturers' excise in the belief that a levy at that level of the distribution process offers fewer administrative problems because of the small number of business units with which to deal. The value-added tax has been extensively used in Europe and has been adopted by the European Economic Community nations as a major revenue source with the goal of uniform rates within each member nation. During the 1950s and early 1960s, Michigan used a business receipts tax that was an adaptation of the value-added tax.


Specific sales taxes on selected commodities have long been used by the states. Selective sales taxes were used in the colonial period, with liquor the most frequently taxed commodity.

Gasoline was selectively taxed by Oregon in 1919. The disadvantage of specific sales taxes is that they do not produce the revenues a general sales tax does.

During World War II a national sales tax was proposed, but no action was taken by Congress. The proposal has been revived periodically, but changes in personal and corporate income taxes have been preferred over a national sales tax.


A great deal of attention is given to the regressive effect of the sales tax because an individual with a low income spends a greater portion of his or her income on consumption goods that are taxed than do those with higher incomes. When the necessities of food and clothing are excluded from the sales-tax base, the regressive effect is reduced.


The impact of sales taxes is on the seller, for in nearly all cases he makes the payment to the state.

However, the incidence or final resting place of the tax burden is on the purchaser of the taxed commodity or service; the price increases or the price is constant, but the tax is stated separately on the sales slip and added to the sum collected from the purchaser. In fact, the laws of some states require forward shifting of the tax to the consumer.


In the late twentieth century, sales taxes became a preferred method of paying for publicly funded sports stadiums and arenas. A growing chorus of critics has argued that the use of sales taxes to finance professional sports facilities is tantamount to corporate welfare. They point out that the biggest financial beneficiaries of such facilities are the wealthy owners of professional sports franchises, who typically gain a controlling interest in the stadium's ownership.

Nevertheless, sales taxes remain a popular way for state legislatures to avoid raising income tax rates, which usually alienate voters more than sales taxes do.

Streamlined Sales Tax in the US

The Streamlined Sales Tax (SST) program is a cooperative arrangement among state governments in the United States for the collection and payment of retail sales taxes when the seller and the purchaser are located in different tax jurisdictions.

Until recently, sales tax did not apply to retail purchases made by a buyer located in a different state than the seller. The main reason was difficulty enforcing and collecting sales taxes among multiple jurisdictions. This was not considered a serious problem until the proliferation of Internet-based sales during the 1990s.

As increasing numbers of buyers made remote purchases using e-commerce in states other than their state of residency, state governments experienced revenue losses because such purchases were not taxed.

While the use of toll-free telephone numbers and direct mail has always caused some loss of tax revenue for states, the e-commerce boom motivated state governments to work together to find a way to recover lost tax revenue. The multi-state agreement, drafted by representatives from 44 states and the District of Columbia, was named the Streamlined Sales and Use Tax (SSUT).

In October 2005, SSUT officially went into effect. As of April 2008, there are 21 states in compliance, (Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, West Virginia, and Wyoming), collecting tax revenue through the program.

Provincial Sales Tax in Canada

The Provincial Sales Tax, commonly referred to as PST, is a a provincial tax imposed on the consumers of most goods and particular services in a particular province.

Because the PST is administered by each province and territory, the provincial sales tax goes by many other names, from the Retail Sales Tax (RST) in Ontario and Manitoba through the Social Service Tax in B.C.. In Nova Scotia, New Brunswick, and Newfoundland and Labrador, the PST is part of the HST (Harmonized Sales Tax), effectively combining the PST and GST.

The PST rate also varies from province to province and is even calculated differently.

Any business that sells products and many businesses that provide services need to register for, collect and remit the PST or RST ( except in Alberta, Yukon, Nunavut, or the Northwest Territories where there are no provincial sales taxes ).

Sales tax around the world

VAT remains a major source of tax income for most of the European Union, Mexico and other countries which charge on average a 15-25% VAT rate.

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 and newspaper.


Sales tax in the world

This is a list of tax rates around the world. It is focused on: value added taxes (VAT)and/or good and services taxes (GST). It is not intended to represent the true tax burden to either the corporation or the individual in the listed country.

Country VAT / GST / Sales
Flag of Austria Austria 20% GST
Flag of Bangladesh Bangladesh 4-15%
Flag of Belarus Belarus 10/18%
Flag of Belgium Belgium 21%
Flag of Brazil Brazil 17-25%
Flag of Bulgaria Bulgaria 20%
Flag of People's Republic of China People's Republic of China 17%
Flag of Colombia Colombia 16%
Flag of Croatia Croatia 22%
Flag of Czech Republic Czech Republic 19%
Flag of Denmark Denmark 25%
Flag of Estonia Estonia 18%
Flag of Finland Finland 22%
Flag of France France 19.6%
Flag of Germany Germany 19%
Flag of Greece Greece 19%
Flag of Hungary Hungary 20%
Flag of India India 12.5%
Flag of Republic of Ireland Ireland 21%
Flag of Israel Israel 15.5%
Flag of Italy Italy 20%
Flag of Luxembourg Luxembourg 15%
Flag of Mexico Mexico 15%
Flag of Monaco Monaco 19.6%
Flag of Netherlands Netherlands 19%
Flag of New Zealand New Zealand 12.5% GST
Flag of Norway Norway 25%
Flag of Pakistan Pakistan 15%
Flag of Poland Poland 22%, 7% (reduced rate on certain goods)
Flag of Portugal Portugal 21%
Flag of Romania Romania 19%
Flag of Russia Russia 18%
Flag of Slovakia Slovakia 19%
Flag of Spain Spain 16%
Flag of Switzerland Switzerland 3.6/2.4/7.6%
Flag of Turkey Turkey 18%
Flag of Ukraine Ukraine 20%
Flag of United Kingdom United Kingdom 17.5%
Flag of Uruguay Uruguay[1] 23%
Flag of Venezuela Venezuela[1] 8-10%/9%
Flag of Zambia Zambia[2] 17.5%
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