What is sales tax?

Sales Taxes

It is a consumption tax that the government imposes on the sale of goods and services, and is usually collected at the point of sale by the seller, who collects it in turn and hands it over to the government. This tax is levied on various selling agencies, whether they are stores, people or subsidiaries, according to specific laws.


The concept of sales tax

The traditional sales tax is imposed only on the end-user of the goods or services. Since most commodities in modern economies go through a number of stages of industrialization undertaken by different entities, a great effort is required from documentation to prove who is the end-user who must pay sales tax. For example, suppose a sheep breeder sells wool to a sewing (yarn) fabric company, then this company sells its product to another clothing manufacturer, which must also obtain a certificate of sale. Finally, the clothing manufacturer sells woolen socks to a retail store, which will charge its customers a sales tax in addition to the price of the socks.


There are various legislations for imposing a sales tax and often overlapping, with states, provinces, and municipal administrations imposing their own taxes. The sales tax is very similar to the usage tax that applies to citizens when purchasing materials from a region whose laws differ from the region in which they live. Both taxes are generally imposed at the same rate, but the usage tax is difficult to apply because it is imposed only on large quantities of material goods purchased.

For example, a lady living in Georgia who buys a car in Florida will have to pay the local sales tax as if she had bought it in her state.


Legal Association

Being subject to a sales tax in a country depends on how the government of that country defines what is called a legal association. The legal association here means the physical presence and the meaning of this presence is not limited to the presence of an office or store, so for this condition to be met, it is sufficient to own an employee or a subsidiary such as your partnership with a website that organizes the traffic to the page of your business in exchange for a share of the profits. This scenario reflects the debate between e-commerce and the introduction of sales tax. For example, New York State passed what are known as Amazon laws that required online retailers to pay sales taxes despite their lack of physical presence in the state.


Production tax

Sales tax is generally charged as a percentage of the price of goods sold. If the sales tax in the state is 4%, in the province 2%, and in the city 1.5%, the residents of that city will pay a total of 7.5% sale tax. Some goods are often exempt from this tax as food and the tax on other goods is lowered under a certain threshold such as buying clothes up to $ 200.


At the same time, a special tax is imposed on some goods called the production tax, and it is a form of this tax (sin tax) such as the local production tax that New York City imposes on tobacco, which is $ 1.5 on each cigarette pack, in addition to the state production tax of $ 4.35 on each A pack of cigarettes contains 20 rolls of tobacco.



The United States is among the few developed countries that still impose a sales tax (note that the federal government does not impose this tax but rather the state government, with some exceptions).

Most developed countries have adopted what is known as value-added tax, which means imposing a percentage of value-added on goods at every level of their production. Referring to the above example of woolen socks, the textile manufacturer must pay a percentage of the difference between the price at which the fabric was sold and the price at which it bought the wool, and similarly, the clothing manufacturer must pay a percentage of the difference between the price at which the woolen socks are sold. And the price you paid to buy the fabric. The difference between this tax and the sales tax is that it is levied on the company's total profits, not just on the end-user. 

The main benefit of using VAT is that it helps get rid of the tax levy (i.e. double the tax) that occurs from the manufacturing stage to the consumption stage. For example, suppose a paper notebook factory purchases raw materials for $ 10, and that includes a 10% tax, meaning that he pays $ 1 to get $ 9 worth of materials.

Then the factory was able to add $ 5 worth of raw materials that he purchased during the manufacturing process for a total notebook value of $ 15. According to the sales tax system, the value of the 10% tax on final goods (here is the diary) will be $ 1.5, while according to the value-added tax, the tax previously charged will be deducted from the total tax to make the actual tax rate 1.50-1.00 = only $ 0.50. 

The wholesaler buys the notebook at $ 15 and sells it to the retailer, $ 2.50, for a total price of $ 17.5. The same thing happens, as the 10% tax rate applies to the total price of $ 17.5 to $ 1.75, and then the taxes that were previously imposed on the factory are deducted, thus making the actual tax imposed on the wholesaler only $ 1.75-1.50 = $ 0.25. If the retailer's profit margin is $ 1.50, then its actual tax (10% x 19) - $ 1.75 = $ 0.15 only. Thus, the total taxes collected from the factory to the final consumer will be 1 + 0.50 + 0.25 + 0.15 = $ 1.90.

The American system assumes that in the event that VAT is not imposed, it will be necessary to impose a tax on the value of goods and profits at every stage of the production process, and this will lead to the accumulation of total taxes paid which leads to raising the prices of goods and services and harming the final consumer. 

Consumption tax

The consumption tax is the tax that is imposed on the purchase of goods and services, and it has many forms, including sales tax, tariffs, production tax, and other taxes imposed on consumer goods and services.


The consumption tax refers to the tax system in which people pay the tax based on how much they consume, rather than how much they add to the economy (i.e. income tax).


The concept of consumption tax

Examples of consumption taxes include retail tax, production tax, value-added tax, usage tax, and taxes on total corporate receipts and import tax. The consumer is responsible for paying these taxes by paying a higher price to obtain the desired good or services. This price increase includes the consumption tax that the seller collects and is transferred to the local, state, or federal government. The consumption tax is imposed at different rates and on various commodities according to the nature of the goods: are they basic commodities (like food) or luxury goods (such as jewelry)?


The consumption tax is not a new idea; The US government used it for a long period of its history before replacing it with an income tax. The Bush administration supported a copy of this tax in 2003, but the proposal was rejected. The proposal called for a shift from a progressive tax system based mainly on income tax to a national tax system based exclusively on consumption tax.

Theoretically, this system is designed to reward savers and punish wasters, and in any case, the United States has not imposed a consumption tax system; But many countries of the world have imposed national consumption taxes. For example, Japan added a 3% consumption tax on income tax in 1989, and the Japanese consumption tax increased to 5% in 1997. In 2012, the increase in the double tax increased to 8% in 2014.

It was scheduled to reach 10% in October of 2015, but its delay was postponed to 2019, and according to the Japan Times, the Japanese government will exclude some commodities such as food, newspapers, and other daily consumables from lifting to keep it at 8%.



Most European countries and Canada impose a consumption tax system in the form of value-added taxes; In Canada, the value-added tax in some provinces is called the goods and services tax, and in other provinces, it is called the coordinated sales tax. Value-added tax is imposed on the difference between the money the product pays for raw materials and labor, and the price at which it sells final goods. Thus, the consumption tax is imposed here on the value added to goods and services from the production stage to the final consumption stage.


Production tax

It is a sales tax imposed on a specific class of goods such as alcohol, tobacco, auto fuel, and tourism. Some production taxes are imposed to restrict the purchase of certain goods that are classified as harmful to the economy. This type of production tax is known as the sin tax. Other production taxes apply to users of certain programs and infrastructures, for example, taxes on motor fuel are collected from drivers and are intended for the maintenance of roads, highways, and bridges.

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