I'm going to take a wild guess and say the author isn't from the US. He includes sales tax on items purchased for resale.... which is an exception in every state that I know of. Even if you purchase an item at retail with sales tax, you can file to receive the money back from the state. Additionally sales tax has nothing to do with whether your supply chain is fully integrated, and hiring all of your suppliers as employees doesn't affect sales tax.
What he also misses: is that if I sell something to another retailer for resale (meaning he says he's going to resell what I sold him), I don't charge him sales tax on the entire purchase. Not until it reaches the final consumer is sales tax charged.
He says this isn't true, and links to a wikipedia article on a gross receipts tax. This is another confusion on his part. Some states do not have income taxes, and instead have gross receipt taxes. This is an alternative to business income taxes, not sales taxes.
The confusion is understandable. No one has ever accused the US of having a simple tax system.
I’m going to bookmark this as an example of how to clearly and specifically point out a bunch of issues with a source while maintaining a constructive tone.
This type of comment makes HN the best forum for discussion on the Internet.
I agree with this. I wish there was more of it. However it seems to me like this is becoming more and more rare on HN or harder to find by being drowned out.
From experience: Watch out for “seems” in these cases.
The number of times I’ve heard someone say “_____ is not like it used to be”, or “it’s harder to find ____ in (name community/event/location/etc)” is significant, and even when it’s true short-term, it rarely pans out long-term unless that very thought spreads to enough people that it becomes a self-fulfilling prophecy.
Like do what you want it’s your life. I’m just saying what I’ve seen.
I disagree with this reading of the article. Perhaps the author edited the article after this comment but I see it structured as:
1. Small introduction briefly mentioning that while exemptions do exist for business inputs, tax systems often fail to have exemptions in all the cases that they ought to (ie the cases that would be exempt under a VAT regime), including four links to estimates of these failures
2. Mention that the real world lies between the following example and a true VAT system.
3. Detailed toy example of the effects of these inefficiencies (ie in the cases where the exemptions do not apply)
4. Brief discussion about reasons for the current system
I’m going to guess that the reason you missed this is that two key points of the argument are hidden in the introduction and the article is dominated by the (perhaps) less important worked example. But maybe you think the claims in the introduction are so obviously false that you don’t see any need in mentioning them, or maybe they were added to the article after you read it.
I didn't change the article between submitting and the time you made your comment. I did just add two paragraphs to the end of the "Before We Begin" section to try to clarify this point. (Your interpretation was what I intended.)
I didn’t really have a problem with the article. I wonder if the issue is that the article looks too much like the (false) claim that sales tax always works like your example, which is refuted by pointing out the exemptions, rather than the claim that the exemptions don’t always work.
I can imagine that pointing out some (hypothetical) tax where rates aren’t marginal could get a similar reaction here (ie lots of “OP doesn’t understand marginal tax rates, but that’s ok because lots of people are stupid,” rather than “oh dear, that’s not a very good tax system, I wonder how that flaw slipped through.”)
This type of blog post is the most dangerous — it has very detailed examples with math and diagrams, which lead the reader to think the author is an expert. Even I — someone who used to be a tax lawyer, but focused on federal issues (not state/local) — was second-guessing my expertise when I read the article.
Everything about it sounded wrong to me, but I couldn't imagine someone taking the time to write up such a detailed blog post without either being a state/local tax expert, or consulting with experts prior to writing this.
I hope that the author can learn more about the topic and revise the post, so that more people are not led astray by incorrect theories and examples that are detailed but not accurate at all.
Author here. I very much appreciate your polite tone! I'm aware that taxes on items for resale aren't treated like in the toy model. (This is mentioned in the article already.)
Can you please take a look at this article and let me know if it changes your view:
I did not find the cost.org article helpful at all. It just seems to advocate that if a business has customers, then everything it buys is a business input, any sales tax the business would pay would be "pyramiding", and the business should be exempt from paying tax on all of it, even things like the pens, paper, and envelopes it uses for old-fashioned business correspondence.
Thanks for the interesting link. I've read it and here are my thoughts:
- The paper talks about business inputs, which is anything a business purchases. Businesses need to pay sales tax on items, unless they are intended for resale. So they're going to be charged sales tax for the coffee machine for the break room for example.
- I disagree that sales tax is a "household consumer"-only tax. It's just a consumption tax. No state exempts all business purchases, so this extra "household" bit is a position they're pushing. Part of their argument is similar to other anti-business tax policy papers that think tanks in the US put out regularly. The argument goes: businesses must pass all costs to consumers, therefore business taxes increase costs to consumers, therefore businesses should not be taxed since it's really consumers that pay those taxes.
- This is the pyramiding they refer to: Business needs to pay sales tax on coffee machine. If they pass this cost on to consumers, they'll increase the price of their products by a fraction of a cent, and that increase will increase the sales tax the consumer must pay (sales tax on that fraction of a cent).
- I'm not surprised by the high percentage of business purchases paying sales taxes. As the paper mentions, 79% of consumer purchases are sales tax exempt (items like food). Of the remaining 21%, many of those items are utilized by businesses.. items like desks, computers, etc. The high percentage of sales taxes being paid by business is likely due to the shear quantity of household purchases that are exempt.
- On the comparison to a gross receipts tax: If I sell pencils (an item generally subject to sales tax), I'm collecting sales tax on many purchases. The difference is that GRT would tax all revenue, versus sales tax would have exceptions for resale, sales to schools and other exempt organizations, sales shipped to areas without sales tax (or where a business doesnt have a nexus), international sales, etc. So to make the comparison work, we need to be very careful about defining the business: I sell pencils locally to end consumers, and I interrogate each customer to make sure they're not affiliated with a school, won't try to resell my pencil, etc. Once we do that, the comparison gets pretty ridiculous. In practice, these are two different tax regimes, and only by glossing over the differences can we make them sound similar.
- On vertical integration to avoid sales tax: This is a very specific scenario that I don't imagine happens too often. A business that sells X, but uses a lot of Y for some purpose not related to producing X. Additionally Y must have a very high markup (if not, the acquirer will be paying sales tax on the inputs for Y, and will save nothing on sales tax). Maybe my imagination is lacking... but I'm having a hard time coming up with a scenario where this would occur and it would be the sales tax (5-8%) that would be the deciding factor on whether to vertically integrate.
My take on this paper is what I mentioned in my 2nd point... it's an anti-business tax paper written to encourage governments to cut business taxes. You can decide your position on that. I generally think businesses should pay taxes.
Not to mention, the example is misleading by ignoring the the government's revenue requirement. If the sales tax system worked the way he says it does, then a 20% sales tax would have to be replaced by a higher VAT tax in order for the government to get the tax revenue they "need" (desire). I don't think any government would take such a massive drop in tax revenue as is implied in the example.
The absolute percentage isn’t important. The problem is that when sales tax fails to work as a consumption tax, it gives a tax incentive to be vertically integrated. And there is implicitly a suggestion that encouraging companies to become more vertically integrated is not a desirable property of the tax system.
The percentage doesn't matter, but the example is clearly misleading on the relative tax revenue collected under the example.
How does it provide a vertical integration incentive? Sales tax is only applied at the final step (or rebates if applied before that). The main integration incentive is the ability to reduce margin at each step (if needed) and have tighter supply chain control.
Let’s be explicit and instead of talking about sales tax which the article claims sometimes acts like VAT and sometimes like a gross receipts tax and instead use those terms explicitly.
In the gross receipts tax regime, tax is applied at every boundary between businesses and so having fewer of these boundaries (ie being vertically integrated) gives a lower final price with workers receiving equal pay. In this way, the tax system incentives vertical integration.
In the VAT regime, the final price and total tax paid is the same whether or not the business is vertically integrated, and so the tax system doesn’t incentivise one option over the other.
The key point is that we first compare two competing business structures under the same tax system, and it turns out the tax rate doesn’t affect the argument so long as it’s positive, and then we compare how those structures relate to each other in different tax systems (where the rates don’t matter because they don’t change the relationship between the structures that both live under the same rate)
The gross receipts structure is used instead of business income tax in some areas and is a separate thing from sales tax. Conflating the two doesn't help anything.
The author's link to support the structure that collects sales tax at every step is really gross receipts. Perhaps there's a better site with a good example and a link to a sales tax structure that exists as they depict it in this article. Even if it did work that way, the primary drivers for vertical integration would be the option to shrink the margins at each step and supply chain control (quality, moating, etc).
Is there an article discussing the differences in policies and rates of vertical integration between counties and the effects of it? It might be better to show that, rather than this article.
I was a corporate manager in a few retail chains with a national presence, a professional services consultant for a software company selling inventory management and point of sales systems to mid-sized chains, and I now consult to distributors and manufacturers regarding ERP and accounting system implementation... roughly 25 years in areas dealing with this question. Your take is pretty good. U.S. sales tax is pretty much a consumption tax across the board. If you are business and are buying for manufacture or resale, you don't pay sales tax; those same businesses will pay sales tax if they business is itself a consumer... so a manufacture will pay sales tax on the paper they buy for the office printer, etc. but not until you get to the end consumer (and by consumer I don't necessarily mean individual person... a consumer can be a business).
I stopped reading the article at "The Sales Tax Regime": it's just wrong. It's not how taxation works for the most part in the supply chain. Not that this was the only problem to this point in the article. The opening point about the "rest of world" is itself one of the classic informal fallacies: argumentum ad populum. At that point it became clear to me that the author didn't have anything on offer that I would learn from.
There is a real problem with sales taxes in the US, but its not found in the article. The problem is the complexity. While there are broad rules of thumb that allow us to generalize that products sold as raw materials or for resale aren't taxed: there are many very nuanced exceptions. Sales taxes and exclusions/inclusions of same are determined at the city, the county, and the state level individually: all with different rates and rules and reporting schemes. And then introduce things like sales tax holidays and the like and get these changing constantly and it's amazing that any of us in the business aren't in prison for tax evasion.... whole companies exist just to keep up with it all. Now of course, that's not just limited to "the sales tax regime". The most difficult tax rule I ran across in retail was in Canada. British Columbia had a rule at the time that certain classes of clothing being sold to children 14 years or younger between certain dates (in the fall as I recall) didn't have to pay the provincial tax (GST applied however)... I might be remembering some details wrong: that was the mid 90's. But getting a general purpose point of sale system to enforce that in a general sort of way was an interesting challenge.
I believe there is a specific situation in that you must have purchased the goods intending resale (see the other reply explaining raw goods) of a further finished good. Buying something as a consumer, (not) using it then reselling it later is taxable.
It's not enough to purchase the goods intending resale; you must also be registered as a reseller.
In fact, if you can't provide a reseller's certificate (or license, the exact term depends on the state) then the seller generally must collect a sales tax on the sale.
Correct.. and it's in that specific circumstance: where you are licensed, and for whatever reason the retailer charged you sales tax anyway on an item for resale... then you can file with the state to receive that money back. My point was that there's no reason any retailer or manufacturer would pay sales tax on the inputs for their goods.
If you're a registered business with a tax ID number, you can deduct sales taxes paid on business inputs (supply) on your income taxes, whether personal or business.
It should apply in all states that HAVE a sales tax. Sales tax is only supposed to be applied to the end consumer sale. There are a lot of similarities between VAT and sales tax along with the differences.
The comment to which you replied said you can deduct sales taxes paid against income taxes.
I think this means that paying $10 would reduce your income tax by $3 (if income tax is 30%). This is different from getting a 100% credit ($10) which is what you'd get with a VAT system.
No, you don't get a 100% credit for VAT against your income taxes; the credit only exists as an offset against your VAT payable liability.
If for some reason you can't offset your input VAT, then you get the same deduction against your income as you would for a sales tax, because it's part of your expenses. BUT NOTE: that if the acquired good is depreciated, then in both cases (VAT or sales tax) the tax-related deduction is spread over several years rather than all at once.
Sorry, I didn't mean to imply that you get a 100% credit against income taxes, only that you get a 100% credit. (The comment to which I replied seemed to think that GP's point - that sales tax can be deducted from income for income tax purposes - was equivalent to a credit for input VAT, which it's not.)
Typically you don't pay in the first place, rather than getting reimbursed (EDIT: AFAIK). It also depends on the state, so I can't give a general answer. To give a concrete example, however, I'll use Washington state:
Probably not unless you're filing sales tax returns regularly and the item was bought explicitly for resale. If you're not filing and selling regularly trying to buy something use it and then sell it to get a refund you're going to run into trouble with the state revenue services soon.
When you file your state business taxes, you put down how much state sales tax you paid, and then you get it back as a credit (not a deduction), so you basically get it all back at the end of the year, if you have a resellers license.
Also, some retailers let you file your resellers license with them and then they don't charge you sales tax because they know you are a vendor who is going to resell it. This system is often abused by small businesses who buy personal items along with their business items and then don't pay tax on their personal items. In theory they have to file use tax at the end of the year (the same use tax you're supposed to file if you buy something out of state and aren't taxed on it), but most people don't.
Regarding resale tax exemptions: technically, yes! BUT the entity selling to a reseller needs to request and maintain a reseller license to prove that the sold goods went to a reseller with the intent of reselling. If you simply claim exemption from sales tax because you know you're selling to resellers, and don't manage reseller licenses, then you could be in for a world of hurt when audited (which happens much more frequently than it does with income taxes).
This is a really great explanation. I'm relatively new to the US, and the system of sales tax struck me as odd until I learned about the various reseller and other exemptions.
The complexity (need for so many exemptions) suggests that the fundamental design may be flawed. If you have VAT, you can do with fewer rules.
VAT is more complicated than sales tax. Far, far more complicated. (I deal with VAT, sales tax, GST, CST, HST, and other consumption taxes as part of job.)
The simplest form of consumption tax is the (Australian) GST: a flat 10% on almost all goods and services.
1) Yes, different industries have different transactional flows. Because VAT applies at every level, complexity is required to avoid unduly interfering with industries with multiple mid-levels.
2) To say GST is exactly like VAT is to say that an abacus is exactly like a supercomputer because they both calculate things.
A GST is not a VAT. A GST is a goods and services tax, not a "value added tax." The GST only taxes the final value of the product or service sold, similar to a sales tax, not the value added at every step. This is important, because it means that a GST does not try to capture the value delta provided by middlemen, while a VAT does and is deliberately designed to do so. Thus, a VAT impairs the value proposition of utilizing middleman. This makes a GST (or sales tax) significantly more efficient from the perspective of taxpayers, though from a governmental revenue perspective, this also means that GST raises less revenue than a VAT would.
A big issue with sales tax is that reseller exemptions only apply to products acquired with the intent to resell, which means the supplier has to know (or be told) if the products acquired in a transaction will be resold, and this creates complexity for every transaction. So instead, the simple way to do it is that every transaction is subject to GST.
To get legitimate resellers and middlemen back to the economic position of not paying GST, they get to offset the GST paid for goods or services acquired to produce their own products or services against the GST they collect for their goods or services. This is superficially similar to the VAT, except that with GST you're done (yes, it's really that simple), whereas with VAT you've still got way more work to do.
(Note that I have spent the last several years handling both GST and VAT compliance. You will not convince me or any other tax professional that a GST is anything like a VAT except in the most superficial ways.)
"Thus, a VAT impairs the value proposition of utilizing middleman."
The UK has VAT. It does not impair the value proposition of utilizing middlemen. When a consumer buys something for £120, £20 of this is VAT, and will be remitted by the retailer to HMRC.
Now, relevant to your point is this: the retailer claims a credit for any VAT she paid when she bought the goods from a middleman. And that middleman will claim a credit for any VAT he paid when he bought from the other middleman. The VAT charged on each transaction in the chain is eventually claimed back. So whether is 1 middleman or 100, VAT does not cause any tax drag. In other words, the existence or number of middlemen in the chain does not change the total amount of VAT collected by HMRC on a consumer's purchase of £120 (£100+VAT).
My reading of the Australian GST is that the mechanics are similar to the above: i.e. GST is charged on all sales, but that GST-business can claim back any GST they paid on things they used in their business.
So this leaves me to wonder: what are the main differences between the operation of UK VAT (as described above) and Australian GST?
It does not impair the value proposition of utilizing middlemen
It absolutely does, and I say this as someone with experience dealing with all types of consumption taxes. VAT reduces the usage of middlemen in countries where VAT systems exist.
So whether is 1 middleman or 100, VAT does not cause any tax drag. In other words, the existence or number of middlemen in the chain does not change the total amount of VAT collected by HMRC on a consumer's purchase of £120 (£100+VAT).
VAT requires the middlemen to track and pay VAT at every level. While this is the same as sales tax and GST, compliance for sales tax and GST is far simpler than it is for VAT. (This is true even before you consider multijurisdictional tax issues for VAT and sales tax.) VAT compliance is more expensive, and this cost gets passed on to the customer.
what are the main differences between the operation of UK VAT (as described above) and Australian GST?
The main difference between GST and VAT is that a GST is charged at a flat rate regardless of the value added. A VAT is only charged on the value added at each step.
That is what makes the calculation more complex. Compare, for example, a product sold at $10 by a middleman under GST vs same product sold in VAT jurisdiction. In GST land, the tax is $1 whatever you paid for the input goods. Your GST payment to the government is based on total output GST charged less totoal input GST paid to suppliers of business expenses. Since the rate is flat, you essentially just take gross revenue less gross business expenses and you're done. In VAT land, the tax depends on the price paid for the goods/services that went into the product/service, so you have to know what prices you paid for those to calculate the taxable value delta. And when you reclaim VAT, different categories of VATable expenses have different rules for what can be reclaimed. So it's not a simple calculation; there's significantly more work involved.
Yes, until they experience taxes anywhere else in the world.
Australia's tax system, at least for businesses, is probably the simplest and most efficient tax system in the world (at least for Australian businesses, it's a bit more of a hassle to get registered for the system for foreign companies).
It's a good model for what an ideal U.S. tax compliance system would look like, however, there are some aspects of it (like the BAS and GST netting) that would not scale in the U.S. due to the higher levels of tax fraud we have stateside.
The example also misses out on the fact that the individual producers (coconut picker, paint maker, etc.) will need to pay self employment tax. That is an extra amount they pay when working for themselves as independent contracts but if they are hired by the cousin's business, that business pays half of the social security and medicare taxes.
For easy numbers, in the independent contractor model, each person pay $0.30 in payroll taxes (before income tax) while in the employee model, the employee only pays $0.15 and the business pays the other $0.15. If gross pay is $1 in both cases, the employee makes more. Because of this, real employers are going to pay salaries of less than $1 to account for overhead like payroll taxes, office space and the risk of providing a steady paycheck vs. paying per production.
I understand the author is simplifying things to make an argument for VAT but there are lots of variables in both scenarios including payroll tax and the option for retailers to purchase goods without paying sales tax to wholesalers.
The self-employment tax is exactly the same as the employment tax your employer pays "for you" in payroll taxes. The numbers may look different to you as in individual because you don't see the taxes the business is paying for the privileged of employing you, but the tax impact is exactly the same and economically it's a wash.
There are a number of goods that do have associated sales taxes that apply on any transfer, including some of the most expensive goods Americans buy. Particularly, in many jurisdictions, there are transfer taxes on houses and cars.
That's not quite true and/or not a difference from countries with VAT:
1. Dealers (who are buying cars for resale) do not pay sales tax on cars. When you sell a used car to a dealer, the dealer doesn't pay sales tax on it. When you sell a used car to an auto recycler / scrapyard, they don't pay sales tax. If you know of any states that are exceptions, I'd love to learn what those are.
2. A quick Google search (by no means comprehensive, so I could be wrong) suggests that most countries with VAT also charge a land transfer tax.
1. It doesn't mean that you can't change those selective sales taxes. We already have selective sales taxes active in the US. For example, I don't pay sales taxes on groceries.
2. Migrating over to VAT doesn't mean these taxes go away.
3. The only guaranteed consequence for switching to the VAT system is that taxes will become less transparent, so they will likely increase.
Of course. I only meant to point out that there are cases sales taxes apply to post-consumer transfers. I would be interested to know what fraction of post consumer sales transactions are indeed subject to sales taxes. You are correct that this does not make VAT inherently superior.
For simplification. If a pound of coffee is bought at Costco, it's hard to figure out if it is for household consumption or for a business.
The business might sell a cup of coffee, or it could be a hotel that gives away free coffee to its guest.
So, at least for sales taxes, it is easier if everyone just pay it and the claim it at the end. It's the same as income taxes, where a set amount is deducted on a pay check and the taxpayer gets a refund at the end of the year.
It doesnt have to be in the same form. It just needs to be an input into the product that will eventually be sold to a consumer, where the sales tax will be charged.
For a really clear example of this, many states have a sales tax exception for equipment that will manufacture goods for resale. So in that case, the equipment never even made it into the final product, except by touching the item that was sold. Equipment has a lifetime, and it's consumed by producing items for resale... so it's exempt.
If I purchase raw material to turn into a final product, that raw material is sales tax exempt.
The only bit that would be up for taxing would be any profit made from that sale. Buy for 2 dollars sell for 3. Only the 1 dollar profit is in play for taxes.
Even then it can be exempt or removed by other items in the tax code. That profit is not part of the sales tax system. It is part of the income tax system.
In my state, items purchased for resale, items purchased to be used as consumable supplies in the manufacture of other items, construction materials, and several other cases are exempt from sales tax via a device called a non-taxable transaction certificate (NTTC). Obtaining NTTCs from the tax department is a slight hassle but it's done via a web system once per vendor and probably hasn't taken me more than a few minutes of my life, as a small-scale reseller. I've also never had an issue with a seller not accepting an NTTC, and in fact some places I obtain goods (certain surplus sales) actually require an NTTC as a condition of participating, since they have opted not to even be capable of collecting sales tax.
Having previously lived in a state with no sales tax whatsoever, I'm not really sure how common this scheme is across states, but given said national marketplaces that require an NTTC as a condition of entry I'm guessing exceptions where such an item doesn't exist are fairly rare (although other states do call them by other names, I have once or twice obtained a similar form from a neighboring state which required such a document for out-of-state purchasers).
So I guess I'm not sure that this author really understands the reality of sales tax in the US - if sales tax really was imposed on every step of the supply chain it would be a huge issue, but it seems that the general principal is that sales tax should only be imposed on sale to the final user.
Of course my state doesn't actually have a sales tax either but instead a gross receipts tax. While technically a tax on the business and not the transaction, the GRT is conventionally passed on to the customer just like a sales tax, so the two are fairly equivalent for typical transactions. Oddly some websites specifically mention New Mexico as a state in which the GRT is not charged to the customer, indicating that the author has never purchased anything in New Mexico...
Author clearly doesn't understand how sales taxes work.
Sales tax is only charged on sales to the final customer. Resellers (aka, stores) are not charged sales tax. [EDIT: Note that a "reseller" is any individual or entity that has registered as a reseller with their state. This usually incurs an obligation to file a sales tax return at least annually.]
In contrast, VAT is levied on every participant in the chain of transactions. (Note that businesses can offset their VAT liability with the VAT they paid for services/goods received.)
(Note that businesses can offset their VAT liability with the VAT they paid for services/goods received.)
this is misleading, it's like saying you can get a salary as a worker. you get the salary. there is no "you can"
the same is true for VAT, the amount you owe is the difference between the tax you paid for the service/goods you bought and the tax you collected when you sold.
at the end of the month or what ever other period you are required to pay taxes the sum is simplified this difference.
with a VAT rate of 25%
if you paid something 125, (100 base + 25 vat) and sold it after for 150 (120 base + 30 VAT) you owe the (30-25) = 5.
In the accounting software the tax rate for every line item is entered when creating the entry. So at the end of the month its easy to make a report.
There are no procedural requirements that i know of, it's how the VAT system works. The only difference is are you in VAT system or not (there are rules when you have to go in). If you are not in the system you cannot offset the VAT but you are not required to collect it also, so whatever you charge you keep . Please give me the example where you are required to collect but cannot offset.
There are per countries some special cases, for some type of items, where the full amount will not be recognized but those are exceptions.
I lead product for one of the leading US sales tax solutions, and have also built products automating EU VAT solutions. I came into these roles with little subject matter expertise, but with enthusiasm for making it easier for small businesses to thrive. So, take these inputs with that perspective, please.
VAT tax rate calculations are trivial, but filing returns is complex.
Sales tax calculations are complex, and so is filing returns. Also, the reseller tax exemptions are not easy (in fact, most tax audit fines come from poor records around tax exemption, not from collecting the wrong amount of tax). As someone operating a SaaS business in the US, I wish we had a VAT system.
It's also worth understanding that in many states, sales taxes are the primary way that local governments can directly generate revenues. To simplify the US tax system, we first need to solve how we equitably fund local governments.
I think the EU made a really good computer system with the VAT, it’s way easier than sales taxes accros state borders.
For curious people: every business entity has a VAT number. VAT has to be paid to the customer’s country (for individuals), the computer system tells you the country rate when you establish the bill. When it’s time to pay, you tell your own government how much you collected for each country and give them the loot. And the countries settle their VAT bills at the state level.
Your red tape doesn’t grow with the number of countries you did business with. And there is no sneaky “you opened a tax nexus here, because you looked at me funny, and now you need a local accountant to sort it out”.
> To simplify the US tax system, we first need to solve how we equitably fund local governments.
I agree differences between states drive much of the complication, with local jurisdiction taxes, such as in Ohio, adding much more complication. My political views fall more to the right than many HN participants, so I am slow to support the Federal government mandating sales tax changes. Do you have an opinion on the Streamlined Sales Tax Governing Board? streamlinedsalestax.org
One way to simplify sales tax without destroying the funding of local governments is to have the relevant portion of sales tax flow to the local governments while removing their ability to set rates and rules on the sales tax - so they get equitable funding, but it's uniform across neighbouring municipalities, and a business can ignore the complexity of how the tax is allocated between various levels of government. This obviously has a political impact and would cause local resistance, though, so it has to be pushed on from above.
Sales tax and VAT are equivalent assuming everyone plays by the rules, this is economy 101.
The difference is in the implementation and where places for abuse are. With VAT you charge it everywhere in the chain and then apply for refunds if the total you paid is higher than the total you collected. The argument is that this makes VAT more difficult to game but this doesn't sound very convincing seeing how the whole criminal industry was created around gaming governments for fraudulent VAT returns. This caused the governments to create more and more reporting requirements making life more difficult for honest businesses. VAT also causes liquidity problems if you rely on fast refunds. This makes it difficult for small businesses because liquidity is a bigger problem for them. What often ends up happening is that they just have higher prices to make up for delated VAT returns.
Living in a VAT country I am not a fan of it. I think taxing consumption is a good idea in general but the burden of the current implementation is too high.
In France when you are a company you don't pay VAT on stuff you buy from other companies, so the main point of the article doesn't work. Because I guess if we had sales tax, companies wouldn't pay it either
Edit: My point is that it will not make a company economically more efficient than several companies
French businesses still pay VAT on stuff they buy from other companies.
Generally, most VAT systems work this way: Business collects VAT from customers for services or goods sold(output VAT), and must pay it to the government. But businesses may offset that liability with the VAT they paid acquiring goods or services that were used in their own revenue-generating activities (input VAT).
So, for example, ACME sells TNT for $10 and VAT is 10% or $1 (output VAT), so price to customer is $11 and ACME's VAT liability is $1. Say ACME paid $0.25 VAT to its suppliers for the chemicals in the TNT and the paper casing (input VAT). ACME's net tax liability is $0.75, and that is how much they would actually fork over to the government.
Note that if ACME's customer is Bugs' Mining Shop, i.e., a business, they still charge VAT on the transaction.
In a sales tax system, ACME would not have paid sales tax to its suppliers at all, and it would not have charged Bugs' Mining Shop a sales tax. Thus, sales tax is generally more economically efficient than a VAT from a business perspective.
Saying that companies don't pay VAT is not entirely accurate. Technically companies pay VAT but get it rebated when they need to send the government the VAT that they have collected.
What is also great: all products targeted at consumers must contain VAT price. If it isn't mentioned, it is assumed it includes VAT. They don't get away with "oh sorry, forgot to mention VAT" at checkout.
Contrast that to every time I buy something from USA its like "oh, you gotta pay your duties" bwam extra ~20+% on price, and all prices in online discussions which are US-centric (e.g. comparisons on products such as recently Airpods Max) do not include tax (whatever you want to call it).
Different VAT throughout EU can be annoying though. Price comparisons within EU, for example. Regularly, Amazon Germany seems cheap or cheaper than Amazon Netherlands. With Prime, shipping is free either way, so sounds good, right? Until you go to checkout, they figure you really do want to ship to The Netherlands (my default and only address whilst logged in, go figure) and bwam price adjusted without being mentioned. Though that might be an Amazon specific issue.
The way it is in US is deliberate - the premise is that you want people to be aware of how much tax they're paying, on the basis that they would be more politically active about taxes if they knew.
There are other countries with sales tax which don't have this cultural quirk, and where prices normally (whether by custom or by law) include the tax.
The mandatory tipping culture is another one. If it is mandatory, add it in the price. Tips should be earned. At least in Europe I know what to expect upfront.
The imperial system is another. Makes it unnecessary difficult to convert units.
Its difficult to change such illogical customs though. They're deeply ingrained in the culture, which is in many ways a dominant culture.
Mm, that’s interesting, because as annoyed as I am about sales tax, I find myself not at all annoyed about the 10% automatically added to my bill for service in the UK or 7% in Thailand.
No, you must pay VAT on intra-EU B2B transactions too. The accounting is more complicated because the buyer pays rather than the seller, but it is still there.
Yeah, the accounting is there, but not the actual transfer. I.e. you're not transferring the actual money to France, which the French finance ministry would then have to send back to the German one once it got it from the French company (in order for the German one to give it back to the company buying the product).
And the accounting is there because of tax fraud, I guess. And I also guess that the US has a similar accounting system where they have to report the amount purchased per tax bracket and the IDs of the companies they bought from.
You don't pay VAT on intra-EU B2B transactions; the buyer adds the VAT amount at their country's rate to both the amount to pay and the amount to claim back, cancelling it out.
it applies, that's the whole point of the "added" part. you pay the government their full cut, but you get all the VAT you paid for back. so only the difference is taxed to you, as is to everyone else in the chain.
Most of us enjoy going to a thing called a "store" where there are usually a variety of options to choose from, where one can easily compare side by side from different manufacturers.
Really? Don’t most of us going into a store, find something, Google reviews, and competitors, and competitors’ reviews and then see if the convenience of being already here outweighs the effort of going somewhere else plus it’s marginal utility increase? Honestly, I’ve shifted a lot of my regular purchases into Amazon subscriptions.
I suppose. I think it more as a delivery mechanism or ordering portal. A far number of my purchases are shipped by Amazon sold by someone else. I don't think of Amazon as doing the curation I think of when I think of a store. I guess maybe it's a bit of a middle ground.
The original is missing an "only". OP is saying that without the resale exemption, stores would be so tax-inefficient that we'd end up buying everything direct from manufacture.
(But it's more likely that stores would operate on a consignment model instead of a resale model.)
Aggregated retail is beneficial to both consumers, because they have a many competitive locations, at each of which then can buy many varieties of good. Similarly this benefits manufacturers, as they can specialise in manufacture rather than retail. Such aggregation increases the efficiency of the economy.
Limiting retail would therefore decrease global efficiency, going against the principle that taxes should not incentivise inefficient behaviours.
I wasn't specifically referring to the concept of exempting resellers from paying sales tax for items they are reselling.
I was questioning the problem of manufacturers selling directly to customers. I prefer to cut out as many middlemen as possible nowadays, in order to ensure the highest probability of getting the highest quality product.
I know Walmart gets lower quality products than other places and whatnot, and manufacturers make subtle adjustments to products to meet resellers' desired price points.
So now, I just buy directly from the brands whenever possible (and definitely not from Amazon for anything high value). I trust Costco's items to have been better vetted and especially Kirkland Signature branded items to be decent, as well as Apple and maybe Nordstroms.
Indeed, there's nothing _wrong_ with direct-to-consumer sales and there are certainly some advantages as a purchaser - not least avoiding any chance of getting counterfeit goods. But there are certainly downsides too.
Especially with the advent of internet shopping, improved delivery speeds, and reduction in cultural inertia, going direct has become more convenient. That said, while DTC shopping may be _more_ convenient than before, it's still noticeably _less_ convenient than retail shopping. This is displayed by the overwhelming preference of consumers for such resellers as Amazon (the likes of which take an extortionate fee, and provide very little for the consumer beyond a single storefront, fast postage and financial trustworthiness).
> I know Walmart gets lower quality products than other places and whatnot, and manufacturers make subtle adjustments to products to meet resellers' desired price points.
This, and more generally the market data held by retailers, is also a benefit of retailers. By aggregating information about purchases of many different consumers over many different brands, retailers are able to drive product development towards products they know will sell even if these preferences will not be expressed directly by consumers or manufacturers.
To summarise, going back to your original point:
> What's the problem with [manufacturers selling direct to consumers]
Manufacturers know how to make things, they don't know _what_ things to make, or how to sell them to consumers. An market where only DTC sales were allowed would have products that consumers generally want less than they do now, with worse service.
Actually, I realise there is another point here, namely the distinction between manufacturer, brand and retailer.
Brands are somewhat confusing to analyse: a brand may manufacture its own products, or it may buy them in; a brand may sell its own products, or it may leave this to conventional retailers. In its purest form the brand does neither and simply exists to advertise itself and collect rent from other market participants.
Generally, it seems that pure-play brands, and DTC sales by manufacturers, are fairly rare, while brands that also sell products to consumers, or that manufacture their prducts are the most common. So it seems that in reality, neither total specialisation as a pure-play brand nor as a triple-play fully vertically integrated brand is efficient, but instead some combination of branding with another function is optimal.
In a sense, sales tax benefits giant factories, and VAT promotes small businesses along the supply chain. It's possible for a solo trader to optimize one operation to compete with a giant factory, but not all operations.
I cannot comment on the sales tax explanation, but the VAT one is completely wrong. Businesses don't pay VAT (unless they are not in the VAT system, e.g. when they are too small or their business is exempt for other reasons), when they charge other businesses VAT they have to pass it to the tax authorities and when they are charged by other businesses, they get it refunded by the tax authorities. The (consumer) customer will pay the VAT surcharge, unless he exports the product to a country with no VAT (or different VAT), in that case he gets a refund and will typically pay the VAT of his country of residence.
Whatever the VAT advantages/differences over sales tax may be, the EU has lost many billions in VAT fraud schemes.
Could anyone who's running a SaaS company in the US discuss what they use for sales tax compliance, ideally something that'll work with Stripe?
The Supreme Court's Wayfair ruling has recently forced US companies to start collecting sales tax in states where they have no presence, and for some states it's crazy complicated to figure out exactly how much tax you're supposed to charge each particular customer.
Before the Wayfair ruling, a Texas company could just say "IP Geolocation- customer in Texas? Y/N." Collect sales tax if Y. Remit taxes, keep records, and you're good on compliance. The rate would be based on your company's Texas address, so you'd charge the same sales tax rate to every Texas customer. If you were a California company, you'd charge no sales tax to anyone.
But now you're collecting for a variety of states that you have no presence in, and some will be crazy complicated. For example, Louisiana says out-of-state sellers have to identify the exact address for every buyer and match it to a huge database of tax districts to figure out which rate to charge that customer. It's crazy! A non-US SaaS company selling into the US would have a huge competitive advantage from not having to figure out this mess.
Anyway, I'd love to hear from you SaaS guys about your compliance strategies!
This post doesn't mention the main reason (in tax policy circles) that sales tax is seen as preferable to a VAT, which is that consumers know how much money is going to the government. With a VAT, you don't know, and it's easy for the government to increase the VAT without purchasers realizing it. In fact, VATs are sometimes referred to as "money machines" — as in, you can just crank them up to generate more tax revenue.
Sales tax, on the other hand, is more salient because product prices are typically shown pre-tax. That means that when you buy something, you know how much of your money is going to sales tax, and people would realize if all of a sudden their $10 purchases were costing $12 with tax instead of $11.
I'm confused by your statement that consumers don't know how much they are taxed by VAT.
I live in a country where the VAT is 25%. If I want to know the VAT of a price I just divide by 5 (the price is 125% of the untaxed price so I need to divide by 5 to determine how much 25% is). By law you always have to provide the price including VAT to consumers so people are aware of the actual cost.
This VAT has not changed for a very long time but if it were to increase (perhaps for good reasons) there would be an outrage. This tax is not being increased without people noticing.
On the other hand decreasing VAT is also not going to happen (even if it might be beneficial). A single point decrease would create a huge budget deficit that would be really hard to cover by other means.
Also, the rate used in the example is double the sales tax rate in even the highest jurisdictions. More to the point, the author doesn't understand that no sales tax is paid when it's being used as a business input for resale.
But the thing that made my radar go up was that it was talking about a US sales tax rate of 20%, which is just plain nuts. Even in CA, the highest rates crest just above 10%.
Now compare this with not having a sales tax or VAT and just having a tax on employment instead - paid by the business, not the employee.
Which follows once you realise that government taxes to release resources for its own use, which given government is largely service based means employees.
Now you have a tax that is progressive, not regressive and deals with the vertical integration issue.
Employees are what create the "value add". Tax is required to release employees for the public use, which means you want less employment in the private sector than there otherwise would be.
A system that gives the government $1 for a painted coconut is better than a system that gives the government $3.52 for a painted coconut, certainly. Except for the government!
In reality, sales taxes tend to be half as large or less and are usually not actually paid on raw good for resale by resellers, so the difference isn't quite as stark, but it is odd that no mention is made of the difference in government revenue, since the government is the entity actaully imposing the taxes!
What's to prevent implementing sales tax to have the same benefits as VAT? I don't see how we need to lose the transparency of sales taxes to get the benefits of selective VAT. For example, in many places in the US, food bought from groceries are not taxable.
Having a sales tax does not mean you can't be selective about it. This is the main thing that the author missed.
I thought VAT models were used because it forces honesty at all levels. If you want to claim back the VAT on your inputs you have to declare them, so the tax department can spot a difference between declared inputs and outputs. It’s still possible to fiddle the numbers but harder than pure sales tax.
Between taxing the consuming or the producing of goods, tax the consuming. When the consume happens is where profit is made. If I produce a bunch, but don't sell anything, I payed a lot of taxes for nothing. Not fair at all.
That seems nearsighted to me. Making it cheaper for vertically integrated businesses to make money kind of forces bigger businesses to buy smaller ones.
This same idea also means that smaller businesses aren't on the same playing field as bigger businesses, because they can't afford to vertically integrate as much. They don't have as much cash to spend. This means that small businesses naturally have a harder time growing.
And this becomes an oligopoly problem. The big businesses get bigger and the small businesses either get bought or get put of business.
That doesn't sound like a healthy market to me. I would much prefer a market with many competitive small businesses that work with other small businesses to build products.
Better products and choice of products are guaranteed this way.
VAT and other models are pure socialist and communist models. Sales tax as imposed by fly over states is correct way. Europe is lost cause. They haven't invented anything in last 70 years neither they have single technology company making heads spin. Communist, from where this author seems to be, only care of adding more taxes. I would say these people have some components of their brain misaligned. I am researching that now which component.
I think there's a couple of options. First if one was to consider the US government a charity they would have a zero star rating on charity navigator; for tax dollar collected versus put to good use. So starting with the end in mind and measuring the result would be the alternative.
Government prints as much money as it needs to pay itself. Now inflation and interest rates might be different type of pain but at least it's not the same pain of filing taxes, figuring out laws or finding someone to do that for you.
This would be mathematically equivalent to a wealth tax on savings in cash or cash-equivalent, no? Meaning that the burden would fall mostly on those who have enough money to save it, but not enough to invest into real estate etc.
Wouldn't this tend to cause overinvestment in durable goods? Instead of putting your money in a bank, you put it in something physical to resell later. Seems inefficient.
It makes intuitive sense right? There exist mutually beneficial transactions that cannot happen because they are mutually beneficial at the original price point and not at the taxed price point.
Sales tax also cripples the used/resale/refurbish product, making it more locally efficient to buy new instead of used, pushing used goods into the waste stream.
1) second-hand goods purchased from a non-business are usually tax-free. With the exception of vehicles. You're asked to pay sales tax on these purchases when filing your income tax each year, but in practice, noone does this.
2) I buy used/refurbished tools and furniture pretty frequently. How exactly is the second-hand market being crippled here?
In general, sellers only need to collect sales tax if they meet the legal definition of "reseller". The test varies from state to state, but is generally a combination of gross annual revenue from sales and number of sales transactions per year. Generally, transactions between private parties are not subject to sales tax.
eBay was hit by special "marketplace facilitator" clauses in remote tax laws that have popped up since South Dakota v. Wayfair. The tax is actually imposed on the marketplace, not the seller. It doesn't matter what the seller's status is relative to the above, because it is eBay that is being required to remit he tax. If the seller is independently obligated to remit tax to a given state as well, they count the eBay-collected tax against their own obligation.
Yes but in practice it means that reselling old used stuff is now taxed, which of course discourages the reuse part of the reduce, reuse, recycle paradigm.
FB marketplace has the same tax requirement, so that only leaves cash transactions on craigslist now (which people probably wouldn't pay the tax even if were required).
But you can buy stuff on FB Marketplace or CL without paying sales tax, even if you use a service like venmo for handling payments. In most states, you are technically supposed to report these transaction on your income tax return, but enforcement of that is not practical for the state.
What he also misses: is that if I sell something to another retailer for resale (meaning he says he's going to resell what I sold him), I don't charge him sales tax on the entire purchase. Not until it reaches the final consumer is sales tax charged.
He says this isn't true, and links to a wikipedia article on a gross receipts tax. This is another confusion on his part. Some states do not have income taxes, and instead have gross receipt taxes. This is an alternative to business income taxes, not sales taxes.
The confusion is understandable. No one has ever accused the US of having a simple tax system.