SALES TAX

levy imposed upon the sale of goods and services. A sales tax levied on the manufacture, purchase, sale, or consumption of a specific type of commodity is known as an excise tax. American terminology in this matter tends to differ from that used in the United Kingdom and former British colonies, however. In the United States, excises apply to imports as well as to domestic production; in British terminology excises may be applied only to domestic output. Whereas excises may be based either on quantities of the taxed product (specific excises) or on value, general sales taxes are inherently value-based taxes. Sales taxes are commonly classified according to the levels of business activity at which they are imposedat the manufacturing or import stage or at the wholesale or retail level. Very often tax rates applied to commodities vary according to whether the commodities are considered essential or nonessential. Many countries impose excise taxes on such products as gasoline, tobacco, and alcoholic beverages. Although taxes on luxury items are politically popular, luxury consumption is difficult to define for tax purposes, and such taxes raise complex administrative problems while generating little revenue. Multistage sales taxes, which are imposed at more than one level of production and distribution, without relief for taxes paid at previous stages, are sometimes called turnover taxes. For reasons of administration and simplicity such taxes are based on gross receipts; consequently, the taxable value at each stage includes amounts taxed at the previous stage (as well as the taxes already paid at previous stages). In order to avoid such pyramiding of taxes, an increasing number of governments employ a value-added tax. This is a modified sales tax based on the net value added at each stage rather than on gross receipts. Roughly speaking, an enterprise's net value added within a given period is equal to output minus input, calculated as its total sales minus expenditure on goods and services purchased from other enterprises. Tax liability is not, however, calculated by applying the tax rate to the value added figured in this way. Instead, receipts are used to show the amount of tax at each step; each seller adds the tax to the price and acknowledges this on his bill. Each enterprise's net tax liability is then calculated as the sum of all taxes it collects on goods it sells minus the sum of all the taxes it has paid on goods it has brought. This is sometimes known as the invoice or credit method of implementing a value-added tax. a levy imposed upon the sale of goods and services. A sales tax levied on the manufacture, purchase, sale, or consumption of a specific commodity is known as an excise tax. Excise taxes have been known since ancient times. The general sales tax is a comparatively recent innovation. Sales taxes are commonly classified according to the levels of business activity at which they are imposedproduction, wholesale, or retail. Excise tax rates frequently vary according to whether the taxed commodities are considered essential or nonessential. Multiple sales taxes imposed on goods at more than one level in the production and distribution chain are sometimes called turnover taxes. Such taxes are frequently based on gross receipts; therefore, the taxable value at each stage includes the taxes already paid at previous stages. In order to avoid this pyramiding effect, a variation called the value-added tax, based on the net receipts (total sales minus expenditures), can be used. In the United States single-stage sales taxes account for significant portions of the revenues of most states. Many local governments impose taxes at the retail level. In Canada the federal government collects a manufacturers' tax, while retail sales taxes are levied by nearly all provinces. Most Latin American countries rely heavily on excises and on sales taxes. In western Europe value-added taxes are common. It is generally assumed that sales and excise taxes are borne by the consumer. Even in turnover taxes, the burden is expected to be shifted to the last buyer in the form of a higher price. Whether the burden is shifted entirely or partly depends on the sensitivity of the demand for a given commodity to increases in price. In many cases the supplier and the consumer share the tax burden in terms of lower profits and higher prices. Because sales taxes at the retail level are strongly regressivethat is, they consume a larger proportion of the income of low-income groups than of higher-income groupscertain classes of essential goods, such as food, clothing, or drugs, are sometimes exempted. Excise taxes are also regressive, although less strongly so, in part because the consumer can choose not to purchase the specific commodities that are so taxed. Excises can, moreover, be so allocated that the burden falls on those who benefit from the tax expenditures, as in the case of motor-fuel taxes being used for highway construction or maintenance. Additional reading John F. Due and John L. Mikesell, Sales Taxation: State and Local Structure and Administration (1983); Clara K. Sullivan, The Tax on Value Added (1965); Henry J. Aaron (ed.), The Value-Added Tax: Lessons from Europe (1981); Charles E. McLure, Jr. (ed.), The Value-Added Tax: Key to Deficit Reduction? (1987). Charles E. McLure, Jr.