Sales Tax

Sales tax is the consumption tax or use tax, which is levied at the time of purchase of goods and services. The government of a country charges the sales tax. If the sales tax is included in the price, it is tax- inclusive and if it is added at the time of sale, it is known as tax- exclusive.

Such a tax cannot be easily averted and it is deductible only once on a particular item. The incidence of the retail sales tax is on the final end user while a gross receipts tax places the burden of tax on the intermediate business buying materials required for production. This procedure prevents cascading in which a single item is taxed several times.

Sales tax is regressive in nature since the amount paid by people is the same irrespective of their economic status. The poor people are also not exempted from the burden of this flat rate of taxation. However, the other side of the story is that the higher income group pays more taxes because their consumption is more. On the basis of the ratio between gross income and spending, the sales tax is regressive. But, the effective tax rates can be said to be progressive if the exemptions and tax rebates are taken into consideration.

VAT or the value-added tax needs to be discussed while writing about sales tax. Invented in France, it is a tax on exchanges. This form of tax is imposed on the added value resulting from every subsequent exchange. It is an indirect tax because the burden of this tax can be transferred to others who are involved in the transaction. Retail wholesale and intermediate sales, all are taxed under VAT.

In the U.S., the idea of replacing the income tax with a national sales tax has been doing the rounds for a long time. In the U.S. when a consumer purchases a commodity from a seller of a state other than his state, no sales tax is charged. But, this loss is made up by the state of residence of the consumer by imposing on him a use tax, the amount of which is equal to the amount of tax avoided.

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Last Updated on : 5th July 2013