How Does Sales Tax Work?

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What is Sales Tax?

  • Sales tax is a tax on consumption, levied on goods and services at the point of purchase. They are typically figured as a percentage on the price of the item in question, but may simply be a flat fee. So a sales tax could be 5 percent of the purchase price or a standard amount such as 10 cents. Sales tax as a percentage of the purchase price is far more common. In Europe, the sales tax is called a Value Added Tax, or VAT.

Inclusive or Exclusive?

  • A sales tax is inclusive if it is already included in the listed price of the item. It is exclusive if it is not figured into the list price. Almost all sales taxes levied in the United States are exclusive, with the major exception being gasoline. Most VATs in Europe are inclusive.

Sales Tax Issues

  • Sales taxes are considered to be regressive, as it turns out that the lower your income is, the greater a proportion of your income you wind up paying in sales taxes. This is because they are not determined on income, and even the poor must consume a certain quantity of goods and services. This is part of the reason why foodstuffs are frequently exempted from sales taxes.

    Sales taxes are often cumulative, with different levels of government levying their own, one on top of the other. For example, in Baton Rouge, LA the sales tax is 4% to 9% for the state and 5% for the city.

    In the United States, out-of-state orders are typically exempt from sales tax. As there is no national, federally-mandated sales tax, state taxation generally cannot apply to out-of-state sales. This is why most Internet transactions are sales tax free.

    Especially high sales taxes are often used as a tool to discourage the public from consuming a certain good. Examples are the taxes levied on tobacco and hard liquor. These were levied with an eye both on their revenue potential and also for moral purposes.

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