Introduction
Sales
taxes are imposed in the United States by state
and local administrations, of which there are
more than 40,000. Merchants (shops and other sellers)
charge the customer a combined rate which bundles
together the state tax with the tax of the locality
in which they sell. Depending on the locality,
the merchant then either pays on the tax to the
state administration, which unbundles it and remits
the locality's share, or pays the state and the
local administration their shares separately.
A
seller has to charge sales tax if it has 'nexus'
where it is located. Nexus, or substantial physical
presence, is established if a business maintains
a temporary or permanent presence of people (employees,
service people or independent sales/service agents)
or property (inventory, offices, warehouses) in
a given locality. There is no over-arching definition
of nexus, so each taxing locality may define it
differently - and many do, leading to endless
problems for businesses which have operations
in multiple states.
Not
all products are subject to sales tax, and states
differ in the exemptions they offer. Food and
clothing is commonly excluded, as are many pharmaceutical
products; purchases for agricultural and sometimes
manufacturing use are also frequently excluded.
The rates of sales tax may also vary within a
state for different types of business. All but
five states impose a general sales tax at the
state level (Alaska, Delaware, Montana, New Hampshire,
and Oregon are the exceptions), but even in these
five states some localities impose their own sales
taxes, and some of the five impose sales taxes
on particular products or services.
Although
from the buyer's perspective, a sales tax is a
sales tax, in actuality there are varying legal
bases for the tax: in some cases the tax amounts
to a 'privilege' tax charged on the retailer's
turnover, in other cases the tax is nominally
imposed on the buyer, and there are hybrid situations
as well. The legal basis of the tax can affect
how it is described on invoices, bills or receipts,
and can affect the calculation of the amount due,
for instance in regard to discounts, although,
needless to say, states differ in their treatment
of discounts.
A
sales tax is a tax on the end-purchase of a good,
or in other words a retail sale, so it normally
does not apply if a sale is for re-sale or for
subsequent processing. Most states define a retail
sale very broadly, including for instance credit
and instalment sales, trade-ins and exchanges.
Normally sales tax is levied on 'tangible personal
property'; it has to be movable, so that real
estate is not included. Intangible property (eg
stocks and bonds) are also excluded.
In
October 2007 Senators Lamar Alexander (R-TN) and
Bob Corker (R-TN) joined Sen. Kay Bailey Hutchison
(R-TX) in reintroducing a bill to make the state
sales tax deduction permanent.
“This
is a simple matter of tax fairness and common
sense,” explained Corker. “Tennessee
is fortunate not to have a state income tax, but
Tennesseans should not be penalized for this on
their federal tax returns. Making the state sales
tax deduction permanent keeps more money in the
pockets of hard-working families and it’s
the right thing to do.”
Alexander
and Corker said that losing this deduction –
which was set to expire at the end of that year
if Congress does not act – would cost Tennesseans
more than $200 million.
Tennesseans
don’t pay a state income tax on wages. In
order to be treated fairly with other states whose
residents are allowed to deduct their state income
taxes from their federal income taxes, Alexander
and Corker said Tennesseans should be able to
deduct their sales tax payments.
Nationwide,
state, and local sales tax collections account
for about a quarter of total state tax revenue,
which is about the same as property taxes and
income taxes. But the current provision allowing
Americans to deduct state and local sales taxes
from their federal income tax return is not permanent.
Under
the leadership of Senator Alexander and Senator
Bill Frist (R-TN), Congress passed a tax relief
bill in 2004 permitting the sales tax deduction
for two years. Congress extended the deduction
for another two years in 2005.
Tennessee
is not the only state that would be unfairly impacted
by the expiration of the sales tax deduction.
Seven states – Alaska, Texas, Florida, Wyoming,
Washington, South Dakota, and Nevada – do
not have a state income tax. Two states –
Tennessee and New Hampshire – only impose
an income tax on interest and dividends, but not
wages.
Historically,
services have normally escaped sales taxation,
but recently many states have begun to broaden
the scope of their taxes to include some services,
particularly if they are ancillary to or linked
with tangible sales.
Since
a state does not have authority to tax outside
its borders (other than when an out-of-state business
has nexus in the state) it is tempting for buyers
to make their purchases from sellers in other
states; and this is especially true when a state's
sales tax applies to purchasers rather than to
sellers. States have attempted to extend the reach
of their sales taxes to cover out-of-state vendors,
but the Supreme Court has consistently refused
to allow this. For this reason, most states have
'use' taxes alongside their sales taxes, which
typically apply to 'use, storage, or other consumption'
within the state where the tangible personal property
is located.
Use
taxes can be easily ignored by individuals, of
course, and often are, with impunity, but businesses
have more difficulty in ignoring them. Goods bought
for out of state for re-sale would not be caught
by a use tax, but a shop that bought fittings
out of state would be liable.
As regards international
transactions, the existing rules are clear about
sales of physical products delivered in the United
States: if the seller is in a country with which
the United States has a double tax treaty (almost
all high-tax countries) then there is no sales
tax unless the company has a "permanent establishment"
in the United States; for other countries (including
almost all offshore jurisdictions) products are
taxed on arrival if the sale is "effectively
connected with the conduct of a US trade or business".
The
advent of the Internet has made something of a
nonsense of the structure of sales and use taxes,
since a seller in one state may distribute products
to buyers in many other states, without tax being
collected at any point. This subject is dealt
with in the section on sales
over the Internet, and the states attempted
answer to the problem is described in the Streamlined
Sales Tax Program section.
From
time to time, there is discussion over the introduction
of a Value Added Tax (VAT). In October, 2009,
t he
Center for Freedom and Prosperity Foundation (CF&PF)
warned that imposing a federal value-added tax
(VAT) in the United States would lead to more
spending, bigger government and a higher tax burden,
following comments from senior Democrats and Obama
administration advisors that such a tax would
be desirable.
Given
the rising federal deficit, set to hit USD1.8
trillion this year, the hefty price tag of the
imminent health care reforms and the fact that
President Obama's tax reform panel is due to report
its recommendations by the end of this year, it
is perhaps not surprising that this debate is
happening again; a similar debate about consumption
taxes was had around the time President Bush created
his own tax panel in 2004. However, this time,
it seems that opinion is crystallizing in favor
of the tax in the places of power rather than
in lecture halls and committee rooms.
Talking
on the subject of tax reform on PBS's Charlie
Rose show recently, House Speaker Nancy Pelosi,
a California Democrat, said that "somewhere
along the way, a value-added tax plays into this,"
before going on to add: "Of course, we want
to take down the health-care cost, that's one
part of it. But in the scheme of things, I think
it's fair to look at a value-added tax as well."
John Podesta, an Obama advisor, has also suggested
that VAT is worth looking at, in a "small
and progressive" way.
However,
according to the CF&PF, the evidence from
Europe, where most countries impose VAT at rates
averaging about 20%, the evidence that such taxes
achieve their goals is far from convincing.
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