A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allows the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a governing body directly by a consumer, it is usually called a use tax. Often laws provide for the exemption of certain goods or services from sales and use tax.
Conventional or retail sales tax is levied on the sale of a good to its final end user and is charged every time that item is sold retail. Sales to businesses that later resell the goods are not charged the tax. A purchaser not an end user is usually issued a “resale certificate” by the taxing authority and required to provide the certificate (or its ID number) to a seller at the point of purchase, along with a statement that the item is for resale. The tax is otherwise charged on each item sold to purchasers without such a certificate and who are under the jurisdiction of the taxing authority.
Other types of sales taxes, or similar taxes, include the following:
- Manufacturers’ sales tax, a tax on sales of tangible personal property by manufacturers and producers.
- Wholesale sales tax, a tax on sales of wholesale of tangible personal property when in a form packaged and labeled ready for shipment or delivery to final users and consumers.
- Retail sales tax, a tax on sales of retail of tangible personal property to final consumers and industrial users.
- Gross receipts taxes, levied on all sales of a business. They have been criticized for their “cascading” or “pyramiding” effect, in which an item is taxed more than once as it makes its way from production to final retail sale.
- Excise taxes, applied to a narrow range of products, such as gasoline or alcohol, usually imposed on the producer or wholesaler rather than on the retail seller.
- Use tax, imposed directly on the consumer of goods purchased without sales tax, generally items purchased from a vendor not under the jurisdiction of the taxing authority (such as a vendor in another state). Use taxes are commonly imposed by states with a sales tax but are usually enforced only for large items such as automobiles and boats.
- Securities turnover excise tax, a tax on the trade of securities.
- Value added tax, in which tax is charged on all sales, thus avoiding the need for a system of resale certificates. Tax cascading is avoided by applying the tax only to the difference (“value added”) between the price paid by the first purchaser and the price paid by each subsequent purchaser of the same item.
- FairTax, a proposed federal sales tax, intended to replace the US federal income tax.
- Turnover tax, similar to a sales tax, but applied to intermediate and possibly capital goods as an indirect tax.