Sales tax

# Sales tax

Overview
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage
Percentage
In mathematics, a percentage is a way of expressing a number as a fraction of 100 . It is often denoted using the percent sign, “%”, or the abbreviation “pct”. For example, 45% is equal to 45/100, or 0.45.Percentages are used to express how large/small one quantity is, relative to another quantity...

rate to the taxable price of a sale.
Discussion

Encyclopedia
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage
Percentage
In mathematics, a percentage is a way of expressing a number as a fraction of 100 . It is often denoted using the percent sign, “%”, or the abbreviation “pct”. For example, 45% is equal to 45/100, or 0.45.Percentages are used to express how large/small one quantity is, relative to another quantity...

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
Tax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...

. 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. Advantages that a sales tax generally has over other forms of taxation are that it is difficult to avoid, and simple to calculate and collect.

### 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
Piraeus is a city in the region of Attica, Greece. Piraeus is located within the Athens Urban Area, 12 km southwest from its city center , and lies along the east coast of the Saronic Gulf....

, Greece in 415 BC. Nearby Athens
Athens
Athens , is the capital and largest city of Greece. Athens dominates the Attica region and is one of the world's oldest cities, as its recorded history spans around 3,400 years. Classical Athens was a powerful city-state...

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
Tax farming
Farming is a technique of financial management, namely the process of commuting , by its assignment by legal contract to a third party, a future uncertain revenue stream into fixed and certain periodic rents, in consideration for which commutation a discount in value received is suffered...

.

The Roman emperor Augustus
Augustus
Augustus ;23 September 63 BC – 19 August AD 14) is considered the first emperor of the Roman Empire, which he ruled alone from 27 BC until his death in 14 AD.The dates of his rule are contemporary dates; Augustus lived under two calendars, the Roman Republican until 45 BC, and the Julian...

collected funds for his military aerarium
Aerarium
Aerarium was the name given in Ancient Rome to the public treasury, and in a secondary sense to the public finances....

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
Tiberius , was Roman Emperor from 14 AD to 37 AD. Tiberius was by birth a Claudian, son of Tiberius Claudius Nero and Livia Drusilla. His mother divorced Nero and married Augustus in 39 BC, making him a step-son of Octavian...

, then abolished completely by Caligula
Caligula
Caligula , also known as Gaius, was Roman Emperor from 37 AD to 41 AD. Caligula was a member of the house of rulers conventionally known as the Julio-Claudian dynasty. Caligula's father Germanicus, the nephew and adopted son of Emperor Tiberius, was a very successful general and one of Rome's most...

.

### 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
Whiskey Rebellion
The Whiskey Rebellion, or Whiskey Insurrection, was a tax protest in the United States in the 1790s, during the presidency of George Washington. Farmers who sold their corn in the form of whiskey had to pay a new tax which they strongly resented...

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 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. 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. Only five states currently do not have general sales taxes: Alaska, Delaware, New Hampshire, Montana 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.

## 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 tax
Gross receipts tax
A gross receipts tax or gross excise tax is a tax on the total gross revenues of a company, regardless of their source. A gross receipts tax is similar to a sales tax, but it is levied on the seller of goods or service consumers...

es, 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
Use tax
A use tax is a type of excise tax levied in the United States. It is assessed upon otherwise "tax free" tangible personal property purchased by a resident of the assessing state for use, storage or consumption of goods in that state , regardless of where the purchase took place...

, 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
Common carrier
A common carrier in common-law countries is a person or company that transports goods or people for any person or company and that is responsible for any possible loss of the goods during transport...

. 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.
• Securities turnover excise tax
Securities Turnover Excise Tax
A Securities Turnover Excise Tax is a small tax on every stock, swap, derivative, or other trade.-History:In the United States, the STET was used to successfully fund the Spanish American War....

, a tax on the trade of securities.
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...

es, 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
The FairTax is a tax reform proposal for the federal government of the United States that would replace all federal taxes on personal and corporate income with a single broad national consumption tax on retail sales. The Fair Tax Act would apply a tax once at the point of purchase on all new goods...

, a proposed federal sales tax, intended to replace the U.S. federal income tax.
• Turnover tax
Turnover tax
A turnover tax is similar to a sales tax or a VAT, with the difference that it taxes intermediate and possibly capital goods. It is an indirect tax, typically on an ad valorem basis, applicable to a production process or stage. For example, when manufacturing activity is completed, a tax may be...

, similar to a sales tax, but applied to intermediate and possibly capital goods as an indirect tax
Indirect tax
The term indirect tax has more than one meaning.In the colloquial sense, an indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the 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
Western Europe
Western Europe is a loose term for the collection of countries in the western most region of the European continents, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a geographic entity—the region lying in the...

, especially in Scandinavia
Scandinavia
Scandinavia is a cultural, historical and ethno-linguistic region in northern Europe that includes the three kingdoms of Denmark, Norway and Sweden, characterized by their common ethno-cultural heritage and language. Modern Norway and Sweden proper are situated on the Scandinavian Peninsula,...

have some of the world's highest valued-added taxes. Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...

, Denmark
Denmark
Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...

and Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....

have the highest VATs at 25%, 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 which each impose a sales tax. For example, sales tax in Chicago
Chicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...

(Cook County)
Cook County, Illinois
Cook County is a county in the U.S. state of Illinois, with its county seat in Chicago. It is the second most populous county in the United States after Los Angeles County. The county has 5,194,675 residents, which is 40.5 percent of all Illinois residents. Cook County's population is larger than...

, 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.

In 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" which is 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, in which case 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 percent 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.

## Effects

Sales taxes are often seen as good tax systems for economic growth, savings, and investment. Economists at the Organisation for Economic Co-operation and Development
Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...

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.

Some people consider sales taxes to be regressive
Regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the...

; that is, they believe that the tax imposes a greater burden on low-income families than wealthy families. 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.

### 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
Dormant Commerce Clause
The "Dormant" Commerce Clause, also known as the "Negative" Commerce Clause, is a legal doctrine that courts in the United States have inferred from the Commerce Clause in Article I of the United States Constitution...

by the Supreme Court in the 1967 decision on National Bellas Hess v. Illinois
National Bellas Hess v. Illinois
In National Bellas Hess v. Department of Revenue, 386 U.S. 753, 87 S.Ct. 1389 , the Supreme Court ruled that a mail order reseller was not required to collect sales tax unless it had some physical contact with the state.-Background:...

. 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
Quill Corp. v. North Dakota
Quill Corp. v. North Dakota, 504 U.S. 298 is a Supreme Court ruling concerning use tax. Quill Corporation is an office supply retailer...

.

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 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
Streamlined sales tax project
Organized in March 2000, the Streamlined Sales Tax Project objective is to simplify and modernize sales and use tax collection and administration in the United States. It arose in response to efforts by Congress to permanently prohibit states from collecting sales taxes on online commerce...

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.

## Sales tax avoidance

Businesses can reduce the impact of sales tax for themselves and their customers by planning for the tax consequences of all activities. Sales tax avoidance often includes 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.

In the United States, online retailers who have no physical presence in a given state can ship goods to customers there without collecting that state's sales tax, because as of 2011, there is no federal sales tax. Amazon.com
Amazon.com
Amazon.com, Inc. is a multinational electronic commerce company headquartered in Seattle, Washington, United States. It is the world's largest online retailer. Amazon has separate websites for the following countries: United States, Canada, United Kingdom, Germany, France, Italy, Spain, Japan, and...

has been criticized for not collecting sales tax, and has intentionally disaffiliated itself from businesses in certain states to continue doing so legally.

In Canada, three types of sales taxes are levied. These are as follows:*Provincial sales taxes , levied by the provinces*Goods and Services Tax , a value-added tax levied by the federal government...

• Sales taxes in the United States
Sales taxes in the United States
There is no federal sales or use tax in the United States. 45 states and the District of Columbia impose sales and use taxes on the retail sale, lease and rental of many goods, as well as some services. Many cities, counties, transit authorities and special purpose districts impose additional local...

• Goods and Services Tax (Australia)
Goods and Services Tax (Australia)
The GST is a broad sales tax of 10% on most goods and services transactions in Australia. It is a value added tax, not a sales tax, in that it is refunded to all parties in the chain of production other than the final consumer....

• Sales Tax Audit
Sales Tax Audit
A sales tax audit is the examination of a company’s financial documents by a government's tax agency to verify if the proper amount of sales tax has been remitted to the proper authority....

• Consumption tax
Consumption tax
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax...

• Excise tax
• Turnover tax
Turnover tax
A turnover tax is similar to a sales tax or a VAT, with the difference that it taxes intermediate and possibly capital goods. It is an indirect tax, typically on an ad valorem basis, applicable to a production process or stage. For example, when manufacturing activity is completed, a tax may be...