What is a Sales Tax?
Sales tax can be simply defined as the tax which is levied by the government on the consumption of various goods and services. It can also be defined as the percentage added to the product and services from which the government earns revenue and do the welfare of the company. In the United States of America, there are 38 different states having different percentages of taxes associated with it – from Alaska (1.76%) to Tennessee (9.45%).
In the USA, businesses are responsible for tracking the collection of such tax from the customers and then remitting or submitting it back to the government
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For eg:
Source: Sales Tax (wallstreetmojo.com)
Types and Components of Sales Tax
#1 – Retail Transaction
It is the most common method for charging sales tax by the government. These include all the retail goods such as FMCG or others which have some additional percentage attached to the final price of the goods. This tax is imposed on the customer.
#2 – Vendor Privilege
These taxes are imposed on the various retailers in the state in which they are operating. It is just like a licensing tax, levied by various governments of the state on the retailers wherever they are operating and doing business in the state.
#3 – Excise
This tax is charged on those kinds of goods, which are not normal. These taxes are levied on goods like cigarettes, alcohol, which usually comes which excise taxExcise TaxExcise tax is the tax applied to the sale of particular goods and services like tobacco, fuel, and alcohol. It is not directly paid by an individual consumer, instead, the tax department levies the tax on producer or merchant of products.read more on it. These taxes are paid by the people who produce them or the wholesalers. The tax is levied to discourage the impact on the goods.
Sales Tax Calculation with Examples
Example #1
XYZ business is operating in the state of Washington in the USA. The state levies of total sales tax of 8% (state tax of 5% + country tax of 3%). The price before this tax is $340 for a product. How much should the business collect from the customer?
Example #2
XYZ business is operating in the state of Washington in the USA. The state levies of total sales tax of 10% (state tax of 6% + country tax of 4%). The price before this tax is $200 for a product. How much should the business collect from the customer?
Advantages
- The charging of the sales tax results in the additional revenue for the government which in turn helps in the welfare of the country
- It brings equality in the economy because the poor citizen who cannot afford one square meal for them the government makes it possible to give them some financial help
- It is easily collected when looked in the comparison of other income tax or any other tax as it comes and is attached with the price of the goods
Disadvantages
- The structure of this tax is very complex and cumbersome as different states and country have different tax structure and treatment of the tax
- This kind of tax increases the cost of the product, and it also leads to double taxationDouble TaxationDouble Taxation is a situation wherein a tax is levied twice on the same source of income. It usually occurs when the same income is taxed both at corporate as well as at the individual level.read more for the citizens of the country
- It is also very regressive as the person who purchases the product needs to pay the tax on the product no matter whether he is rich or poor or any other class
Important Points to Note about Change in Sales tax
- More than 30 countries in the USA have adopted economic nexus policies. Including the two giants California and Texas
- It is being charged on sins such as Tobacco and alcohol
Conclusion
Sales Tax is the type of indirect tax which is levied on the number of sales, considering the exempt and nonexempt supplies, tax is collected from the recipient of goods, making it an indirect way of tax collection, and ultimately is paid to the government.
Sales Tax is just one part of the structure and should be considered in the context. It is something that can have an immediate impact on the products and services. Many sales tax, as explained above, are regressive, and it is a burden on the lower-income group.
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This article has been a guide to what is Sales Tax and its Definition. Here we discuss steps to calculate sales tax along with practical examples, Types, Advantages, and Disadvantages. You can learn more about Accounting from the following articles –
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