A Full Guide to Sales Tax

Sales taxes are imposed on the purchase of items, as a percentage of the cost of that item. For example, in states that have a sales tax of six percent, taxpayers would pay that sales tax rate on all taxable items purchased in that state. There are however, some items exempt form the sales tax, depending on the tax jurisdiction. In some states, items considered a necessity for survival, such as food, are not taxed. In other states, clothing may not be taxed. Each state is able to make those determinations as there is no federal law that dictates which items should and should not be taxed in each state. Currently, there is no federal sales tax imposed on most items. There are some federal excise taxes, such as those imposed on cigarettes, gasoline and fuel.

Background:

Sales taxes are imposed at differing rates in each tax jurisdiction. In fact, each tax jurisdiction may apply differing types of sales taxes. In each case, sales taxes are considered to be regressive. Regressive taxes are those that tax items as a percentage of the sale price. In that way, those with lower salaries, pay a higher percentage of their salary towards that tax. In order to be progressive, a sales tax would have to be imposed as a percentage of a taxpayers income, which would nearly impossible. For that reason, many people argue for an elimination of the sales tax, in favor or a progressive income tax, which could more easily be implemented.

Types:

There are several types of sales taxes and each tax jurisdiction can make determinations as to which types of sales taxes they wish to impose. In fact, each jurisdiction is able to determine the rate of taxes imposes on taxpayers.

There is an excise tax which is imposed on certain items that the government wishes to discourage the use, or purchase of. For example, many states impose a large excise tax on cigarettes. A pack of cigarettes may be taxed on the federal level, the state level, and the local level. So an individual buying a pack of cigarettes in one state, may only be taxed 7 cents in their tax jurisdiction. Added to the federal tax, the excise tax on that pack of cigarettes would be around one dollar and seven cents. In other states, taxes make up almost seventy percent of the cost of a pack of cigarettes.

The same is true for alcohol purchases. Alcohol is taxed as a measure of volume, as opposed to a percentage of price. In both cases, the government wishes to discourage consumption of these products. There is also a use tax which is imposed on purchases made outside of the taxpayers jurisdiction. However, they are only required to pay the use tax on that item, if the item is taxed in their state. For example, a New Jersey resident that buys clothes online, does not have to pay a use tax, because there is no clothing sales tax in New Jersey. Some states expect taxpayers to honestly report any purchases made out of state.

While other states impose a use tax as a percentage of the each taxpayers salary, assuming a certain amount of out of state purchases. Currently, there has been a push towards the Value Added tax, which would be a federal sales tax. The tax would apply across the country and would be added to the taxes already imposed on purchases.

NEXT: Consumption Tax at a Glance