Sales tax
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A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. There are usually a list of exemptions. The tax can be included in the price or added at the point of sale.
Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a gross receipts tax levied on the intermediate business who purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding," in which an item is taxed more than once as it makes its way from production to final retail sale.
Effect on consumers
Sales taxes are considered by some as regressive, that is, low income people tend to pay a greater percentage of their income in sales tax than higher income people, because they tend to spend a higher percentage of their income on consumable items. Others consider sales tax preferable since it taxes only consumption and may be an incentive for savings. In many locations, "necessary" items such as non-prepared food, clothing, or prescription drugs are exempt from sales tax to alleviate the burden on the poor.
A related type of tax is the value-added tax or VAT. It is a system in which all businesses remit taxes on their sales but they are also refunded the amount of VAT remitted by their suppliers. In addition to avoiding cascading, under VAT there is no need for government to determine which sales are taxable and which are not, since all sales--retail, wholesale and intermediate--are taxed. Some or all of these taxes may be refunded but it generates a lot of paperwork (and income). The VAT paperwork can be burdensome but it remains a major source of tax income for most of the European Union, Mexico and other countries which charge on average a 15-25% VAT rate. Canadian sales taxes range from 0% in Alberta to an effective 10.6% in Prince Edward Island where sales tax is also applied to the federal Goods and Services Tax.
Most countries in the world have sales taxes or value-added taxes at all or several of the national, state, county or city government levels. Countries in western Europe, especially in Scandinavia have some of the world's highest valued-added taxes. Norway, Denmark and Sweden have the highest VATs at 25% although reduced rates are sometimes used.[citation needed] In some countries, there are multiple levels of government which each impose a sales tax. For example, sales tax in Chicago is 9%, consisting of 5% state, 2.25% city, 0.75% county and 1% regional transportation authority. And in Baton Rouge, Louisiana is 9%, consisting of 4% state and 5% local rate.1 However, there is no nationwide sales tax in the United States.
Since the 1990s, the idea of replacing the income tax with a national sales tax has been floated in the United States; many of the actual proposals would include giving each household an annual rebate, paid in monthly installments, equivalent to the percentage of the tax (which varies from 15% to 23% in most cases) multiplied by the poverty level based on the number of persons in the household, in an effort to reduce the sales tax's inherent regressivity. While many political observers consider the chances remote for such a change, the FairTax Act has attracted more cosponsors than any other fundamental tax reform bill introduced in the House of Representatives.
If a person purchases goods from an out-of-state seller, sales tax is not due, but rather the customer may owe a so-called use tax. For example, if a person purchases a computer from a local brick-and-mortar retail store, the store will charge the state's sales tax. However, if that person purchases a computer over the internet or from an out-of-state mail-order seller, sales tax may not apply to the sale, but the person could possibly owe a use tax on the purchase. Because of exclusions on what is taxed and not taxed the typical consumer will pay on average about 1/3 of the listed sales tax on all his/her expenditures, i.e. a 7.5% tax will collect on average about 2.5% of a persons income.[citation needed]