What is a sales tax?

We define sales tax as a percentage of the exchange price of goods or services (income for the state). The customer (business or individual) generally pays it for each purchase of goods, but the seller is responsible for collecting it and paying it to the state. Sales tax or service sales tax is an indirect tax because it is not borne by the person who pays it. Namely, the sales tax for the consumer is paid to the tax administration by the trader who does not bear that tax but is borne by the customer in the price paid. Sometimes we consider this tax regressive because the tax burden falls harder on taxpayers (i.e., final taxpayers) with lower incomes.

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How to calculate sales tax?

Whenever we buy something, we need to look at the price of that product service. If it is a discount, we usually look at the previous price to compare the lower price. Sales tax is most often calculated to determine our costs, tax rates, and impact on purchases. There are several ways we can calculate exactly how much sales tax is:

Cost of an item or service x sales tax (in decimal form) = total sales tax

1. We will multiply the price of our product by the given tax to find out how much the total costs with the production cost us.

When we say in decimal form, if it is about 8.5% of sales tax, it is 0.085. We get this by dividing the figure of 8.5 by 100.

2. To get the total costs, it is important after calculating the sales tax to add it to the basic whole, and in that way, we will get the total costs. If we have a sales tax of $ 8 and our product costs $ 200, our total cost will be $ 208.

3. If you know the item’s initial price, you can “recalculate” by working backward. If you know how much the item originally cost, you can work backward to figure out the sales tax rate.

History of the sales tax

Sales tax of goods is depicted on the walls of ancient Egyptian tombs dating back to 2000 BC. This figure illustrates the tax collection for certain commodities such as cooking oil. The US government has never used a general excise tax, but the whiskey excise tax enacted in 1791 was one of the first financing efforts. The 1794 Whiskey Rebellion broke out because taxes were not popular with farmers on the western border. 

 US Federal and State Sales Taxes For the 19th century were not common but optional. However, during the Civil War, because excise taxes were applied to so many specific products, they together acted as general excise taxes.

Although Kentucky repealed the excise tax in 1936, the first broad general excise tax in the United States was enacted in 1930 by Kentucky and Mississippi. The 1950s. Kentucky re-enacted the consumption tax law in 1960. In the 1960s, 11 states also enacted excise tax laws, and in 1969 Vermont was the last.

Sales tax in the USA

When you are customer of goods in the United States, you almost pay more than the list price. This is because sales tax may vary by state or city but is usually about 4% to 8% of the product’s retail price, which is collected when paying in physical stores, online retailers, and restaurants. Know that some American states do not have sales tax. These states currently include:

  • Delaware
  • New Hampshire
  • Montana
  • Oregon
  • Alaska

Sales tax rates range from 0% to 16 depending on the primary and types of business goods or services, with different sales tax enforcement in all states. The excise tax provides nearly a third of local government revenue and is second to the income tax in importance as a source of income. Dependence on consumption tax varies greatly from country to country. Excise tax is much more important in the South and West than in New England or the Midwest business industrial zone. Florida, Washington, Tennessee, and Texas all generate more than 50% of their revenues from excise taxes, and some of these countries finance nearly 60% of their revenues from excise taxes.

On the other hand, New York does not finance 20 % of its income from excise taxes. And food seeds are exempt from taxation in Texas. Vermont gives a general sales tax of 6%, but there is an additional 10% tax on purchasing alcoholic beverages that are consumed immediately. Here are some examples of tax differences in other jurisdictions. Sales tax rules and regulations vary widely from state to state.

Overview of the sales tax rates for different states

StateGeneral State Sales TaxMax Tax Rate with Local/City Sale Tax
Alabama4%13.5%
Alaska0%7%
Arizona5.6%10.725%
Arkansas6.5%11.625%
California7.25%10.5%
Colorado2.9%10%
Connecticut6.35%6.35%
Delaware0%0%
District of Columbia5.75%5.75%
Florida6%7.5%
Georgia4%8%
Guam4%4%
Hawaii4.166%4.712%
Idaho6%8.5%
Illinois6.25%10.25%
Indiana7%7%
Iowa6%7%
Kansas6.5%11.5%
Kentucky6%6%
Louisiana4.45%11.45%
Maine5.5%5.5%
Maryland6%6%
Massachusetts6.25%6.25%
Michigan6%6%
Minnesota6.875%7.875%
Mississippi7%7.25%
Missouri4.225%10.85%
Montana0%0%
Nebraska5.5%7.5%
Nevada6.85%8.25%
New Hampshire0%0%
New Jersey6.625%12.625%
New Mexico5.125%8.688%
New York4%8.875%
North Carolina4.75%7.50%
North Dakota5%8%
Ohio5.75%8%
Oklahoma4.5%11%
Oregon0%0%
Pennsylvania6%8%
Puerto Rico10.5%11.5%
Rhode Island7%7%
South Carolina6%9%
South Dakota4%6%
Tennessee7%9.75%
Texas6.25%8.25%
Utah5.95%8.35%
Vermont6%7%
Virginia5.3%6%
Washington6.5%10.4%
West Virginia6%7%
Wisconsin5%6.75%
Wyoming4%6%

Three ways to differentiate sales tax

Sales tax varies according to the determination of the base, the number of tax rates, and the collection point.

  • According to the determination of the base, sales tax can be introduced per unit of product service, the so-called unit tax, or is charged on the value of the product, the so-called—ad valorem tax (sales skills). Most excise duties (or as they are also called special taxes), for example, on tobacco, petrol, or alcoholic beverages, are expressed by a certain amount for each unit purchased. Unlike the unit tax, the ad valorem tax is calculated as a percentage of the value of the goods purchased.
  • According to the number of tax rates, sales tax can be a general tax. The same tax rate applies to the purchase of all products or the selective tax we add to the purchase of different products at different rates.
  • According to the collection point, the sales tax can be single-phase or multi-phase. Multi-stage sales tax is levied on the same product in all successive stages of the production-sales chain. The single-stage sales tax is collected at one point in the production-sales team chain: at the manufacturer’s, wholesale, or retail. Sales tax at the production stage is a single-stage tax that we use for the sale or delivery of goods by the manufacturer. The calculation of a single-stage retail tax is on the sale of goods to the final consumer in retail trade. Wholesalers charge that wholesale tax to retailers. The advantage of the wholesale sales tax is that compared to the retail tax on end consumers, the number of taxpayers will be is significantly lower.

Advantages and disadvantages of sales tax

Advantages

The advantage of sales tax is the ease of collecting it. Namely, it is collected from retailers as a percentage of the selling price. To collect this type of tax, the tax authority does not need to have as much data on taxpayers to collect other taxes, primarily income tax. Namely, to assess the taxing power of each taxpayer, the tax authority must collect numerous data on the types of income, the number of dependent family members, various expenses of the taxpayer that are exempt from taxation, and the like. It is not necessary to do all this when collecting sales tax. But this does not mean that the collection of sales tax is spared all administrative problems.

The simplest to collect is the general retail sales tax, which we collect at a single tax rate. For various economic, marketing sales, and social reasons, the problem arises when the tax authority decides to apply differentiated tax rates that require the definition of a larger number of products. Ambiguities arise when taxable ones are inaccurately different from non-taxable transactions. A classic example is the taxation of bread at lower tax rates to protect citizens’ standards. We first need to define what we actually consider as bread because fine pastries will soon be on the list for lower taxes.

Disadvantages

The main disadvantage of sales tax is its regressiveness, i.e., the characteristic that it burdens the poor relatively more. Namely, the rich spend a smaller part of their income and most savings (invest). While the poor mostly spend their entire income and can save almost nothing. Thus, the poor pay a relatively higher amount of sales tax in relatively higher consumption. But at least two problems call into question such a conventional view of the distributive features of sales tax.

Reasons for non-convective sales tax determination

First, the reduced share of consumption of the rich in determining regression is observed according to annual income. However, research shows that the share of consumption by living income at all income levels is approximately equal, i.e., that all citizens spend a similar portion of their living income. Therefore, the tax burdens all citizens with an equal burden.

Second, the characteristic of sales tax is that it rolls over. We assume that consumers of these goods bear the entire burden of sales tax. The abolition of this tax is, mainly, in a complicated way that depends on the elasticity of supply and demand. Here is an example: by introducing a tax on fur coats, we are trying to burden the rich, the most frequent customers of these luxury goods, with taxes. But they may choose not to buy a fur coat that becomes too expensive for them due to taxes.

Then there will be a drop in sales of fur coats, and the owner of the fur workshop will have to cut his costs, including probably the wages of his workers. Any increase in fur apparatuses did not affect the rich, but poorer citizens working in the fur shop paid lower wages. Due to the complicated rolling process, it is not easy to determine who ultimately bears the sales tax, and therefore it is difficult to draw definitive conclusions about its regressivity.

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Types of taxes

Taxes prescribed by law are:

a) real estate transfer tax,

b) inheritance tax and

c) gift tax.

Why do we have to pay taxes?

Taxation is currently the only known practical way to raise public expenditure on the goods and services we all use. Taxpayers seem to be all around us: income tax and contributions are withheld directly from our salary, the value of VAT increases the price of the goods we buy, we pay real estate sales tax when we buy an apartment, excise duty when we refuel a car or drink beer in the cafe. Almost every one of our activities related to goods and services is accompanied by some tax.

As Benjamin Franklin says, in this world, nothing is certain except taxes and death. But it seems that, despite our disapproval, it must be so. Taxes are the price of public goods that we use almost every day, and very often don’t even ask how much is their price. Public goods are, e.g., public health care, our public education children, public safety on our streets, etc. To enjoy all this, we have to pay taxes.

When taxes came?

Taxes are as old as civilization. There is not a single civilization that has not collected taxes. The first civilization we know anything about began six thousand years ago in Sumer. The fertile plain between the Euphrates and Tigris rivers, in present-day Iraq. Waking up civilization, but also the awakening of taxes was recorded on clay tablets excavated in Sumer.

Residents there accepted taxes during the Great War. Taxpayers were reluctant to give up their tax benefits when they ended the war. From those times, they never abolished taxes, indeed throughout history, they only gained in importance. During the great wars, they usually increased dizzyingly. After the end of the war, they most often did not return to pre-war levels but continued to grow. But also in peacetime over the years, the tax level especially in business increases.

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