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A sales tax is an ad valorem tax or 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 is usually a list of exemptions. The tax can be included in the price (tax-inclusive) or added at the point of sale (tax-exclusive).
Most sales taxes are collected by the seller, who pays the tax over to the government which charges the tax. The economic burden of the tax usually falls on the purchaser, but in some circumstances may fall on the seller. Sales taxes are commonly charged on sales of goods, but many sales taxes are also charged on sales of services. In a perfect scenario, 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. This is rarely the reality.
A conventional or retail sales tax is charged only on the final end user. To achieve this, a purchaser who is not an end user is usually required to produce to the seller a "resale certificate."The tax is charged on each item sold to purchasers who do not produce such a certificate.
There are several other types of sales taxes:
- Seller or Vendor Taxes, for a gross receipts tax levied on all sales of a business. This produces 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.
- Consumer Excise Taxes, often on high value items like gasoline or alcohol, and often imposed on the producer rather than the seller
- Retail Transaction Taxes
- 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 permitting the seller to remit to the government only the difference between the tax charged to the purchaser and the tax paid by the seller to its suppliers (the "value added").
- Use tax, imposed directly on the purchaser on goods purchased without sales tax, for example purchases made in another state or purchases over the internet. Use taxes are commonly imposed by states in the United States, but are difficult to enforce except on large items such as automobiles and boats.
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. In some countries, there are multiple levels of government which each impose a sales tax. For example, sales tax in Chicago (Cook County), Illinois is 10.25%--the highest among major cities in the United States--consisting of 6.25% state, 1.25% city, 1.75% county and 1% regional transportation authority, Chicago also has The Metropolitan Pier and Exhibition Authority tax on food and beverage of 1% (which means eating out is taxed at 11.25%). And in Baton Rouge, Louisiana, the tax is 9%, consisting of 4% state and 5% local rate. Combined sales taxes in the town of Arab, Alabama were highest in the US at 12% in 2008 according to a study by tax firm Vertex, Inc. In Tennessee the sales tax is 9.25%, due to the lack of a state income tax. However, there is no general nationwide sales tax in the United States.
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.
Sales tax planning
In many jurisdictions, there are opportunities for corporations to proactively plan and structure significant transactions to reduce future tax burdens. Corporate sales tax planning may include the following:
- Determination of ways to legally reduce the amount of tax due on a transaction. For instance, how a company structures its invoices can affect the taxability of the entire transaction. Each jurisdiction has different rules for applying sales tax. Some jurisdictions' laws are more advantageous to taxpayer for certain types of transactions. If a business operates in several jurisdictions, choosing the best one in which to take delivery can reduce or eliminate the sales tax liability.
- Review of company purchases to determine which assets may qualify for exemptions. Finding overlooked exemptions often results in significant savings.
- Periodic review of procedures relating to sales & use tax data gathering and retention. Proper supporting detail, including exemption and resale certificates, and invoices and other records must be available to defend the company in the event of a sales and use tax audit.
Portions of this article were adapted from Wikipedia.