A sales tax is a certain percentage of tax imposed by the government on the sales of goods and services. As per the law, a seller can collect some amount of sales tax from the consumers they are selling goods and services to. The sales tax does not produce any revenue to the seller. However, a seller is responsible to collect sales tax from consumers and pass it to the official authorities.
Economically speaking, sales tax is an excise tax. This is because sales tax is collected from the end users rather than from the seller. Quite similar like transportation and consumption tax, sales tax is also an indirect tax because it is directly embedded into the purchasing price of the goods and services.
Sales tax is only charged by the end user of goods and services because a product passes through several manufacturing stages which are operated by different entities and it will require a huge amount of documentation to prove who should be responsible for paying sales tax. For example, a sheep farmer sells wool obtained from sheep to a company which fabricates yarn.
The yarn maker should get a resale certificate from the government that proves that he is not the end user to avoid sales tax and the yarn is further sold to a garment maker who should also get a resale certificate from the government.
At the end of the process, the garment maker will sell garments to a retailer who will charge the sales tax on the garments sold along with the price of the garment. Different sales tax is levied by different jurisdictions, which usually overlap to increase the final price of the goods because of states, countries, and municipalities each levy their own different sales tax.
Sale tax has quite a lot of similarities with the use of taxes, which is applicable to the purchaser when he buys a product outside his jurisdiction. Use taxes have quite same rates as sales tax but they are difficult to enforce, hence, they are applied on a large purchase of the product.
For example, a resident of California who purchases a mobile phone in New York; he would have to pay the local taxes in New York, as though he had bought it at home. In the article ahead, you will learn about the advantages and disadvantages of sales tax.
Table of Contents
Advantages of sales tax
1) Fairness
Citizens of a country are taxed differently depending on their incomes. For example, a citizen who earns $100,0000 annually will pay significantly high taxes than the citizen who earns $100,000 annually. Sales tax removes this type of unfairness and a citizen would have to pay tax according to the number of goods or services they consume.
2) Simplicity
United States income taxes are very complex. For example, people will be taxed at a different rate, because of the variation in the amount of salary they earn. Which confuses end payers and they have to maintain detailed records to avoid legal issues. Sales taxes are quite simple in this regard. Everyone has to pay the same price to buy a product. Hence, citizens are not required to maintain any detailed records.
3) Revenue
Sales tax is incurred on each item whether it is bought to use as a day-to-day necessity or for luxury. A small amount of tax on each item does not feel too high to the taxpayer, but these collected small amounts will generate a large amount of revenue for the government which can be used for the well-being of the nation or for the well-being of the nation’s citizens.
4) Contribution
Sales taxes including many other taxes is a great way to make even poor citizens of a country contribute to the nation’s pay. Most of the times, poor citizens are exempted from paying any type of tax and a large part of the government’s revenue is spent on poor citizens. Therefore, poor citizens do their bit to contribute to the nation’s income.
5) Easy collection
Unlike other types of taxes, the collection of sales taxes embedded in the price of the goods and services. The sales tax is automatically collected when goods and services are sold. Therefore, it is easy for both tax collector as well as for the taxpayer.
6) Non-evadable
You must have come across people who hide their income to save income tax, but sales tax can’t be evaded because it is included in the price of the goods and services. A taxpayer can’t elude this tax if he wants to use a particular good or service.
7) Elasticity
Sales taxes are not imposed on everyone. Irrespective of income, this tax is imposed only on people who buy a particular product.
8) Impartial
A sales tax levied on luxury goods is only payable by the consumers who buy them. Therefore, these taxes are impartial in nature.
9) Check Harmful Consumption
Sales taxes are a good way to control harmful products like tobacco and alcohol etc. sales tax on these goods is kept high to reduce their consumption.
Disadvantages on Sales tax
1) Relatively High Taxes
The high tax on certain goods like cigarettes and alcohol make a huge burden on consumers.
2) Abuse of taxes on industries
sales taxes can be used politically to destroy an industry or a company. There are certain products whose prices have to be kept high to make a profit. In the scenarios, where the tax on goods produced by one company is higher than the similar goods produced by other similar company. The chances of survival of those companies will reduce.
3) Manufacturing Cost
Sales tax on goods will also increase the manufacturing cost of products because manufacturing companies have to pay more to buy raw materials. Hence, the cost of manufacturing products will increase and consequently, the price of the final product will increase which will become a burden on the pocket of the final consumer.
4) Regressive
Sales taxes are regressive in nature because it is easy for a rich person to pay price for goods no matter how high it is, at the same time it becomes a burden on the poor person. Take an example of salt. The tax on salt is not a burden on a rich person, whereas, it is a huge burden on a person with low income.
5) Raising Prices unduly
The sales tax causes an increase in the price of a product. Usually, the seller adds a greater amount in the price of the product than tax and if there is more than one middle seller for a product. The price of the product increases unduly under the name of sales tax.
6) Uncertain
Revenue generated from sales tax is uncertain, because of the demand for products in the market. Sales tax imposed on goods increase the prices of the goods, which results in a decrease in the demand for the product.
7) No civic consciousness
The sales tax does not develop civic consciousness, because taxpayers are not aware of the tax they are paying as it is embedded in the price.
8) Uneconomical
collecting sales tax is not an easy job. A sales tax levied on every product has to be taken care of. To do this, the government needs to have a team of administrative people to manage everything effectively.
9) Harmful for industries
Sales tax increases the burden on the manufacturing industries. These taxes discourage industries because of the high cost of production and less profit.
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