10 ms·

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 stat

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.

gowld 6y ago
> What he also misses: is that if I sell something to another retailer for resale , I don't charge him sales tax on the entire purchase. This is covered in the article: "a retailer usually won’t pay sales tax on a manufactured good they intend to a consumer in the same form."
- rgbrenner 6y ago
  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.
  - sumtechguy 6y ago
    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.
- deleted 6y ago
  [deleted]
jmole 6y ago
Where can you file for sales tax reimbursement? Essentially all online resale sites (eBay, Reverb, etc.) are charging sales tax on secondhand goods. So if I buy something, then sell it later, that first purchase should be considered a "resale" purchase, right?
- pionar 6y ago
  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.
  - asdfaoeu 6y ago
    Is that all states? That just sounds like VAT
    - Tagbert 6y ago
      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.
    - rahimnathwani 6y ago
      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.
      - gamblor956 6y ago
        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.
ghgdynb1 6y ago
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.
- camhart 6y ago
  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.
  - joshspankit 6y ago
    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.
    - eganist 6y ago
      Would be interesting to automate retrospective analysis across every comment posted on HN and chart language trends over the years.
  - jdxcode 6y ago
    people have been saying this ever since I joined HN in 2009
    - jaxn 6y ago
      And throughout those years, HN has remained the most constructive discussion of any slice of the internet I visit.
- deleted 6y ago
  [deleted]
giantg2 6y ago
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.
- dan-robertson 6y ago
  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.
  - giantg2 6y ago
    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.
    - dan-robertson 6y ago
      Did we read the same article? 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)
megiddo 6y ago
He also confounds costs with prices. Costs are not a significant factor in the prices of market goods - that is dominated by supply and demand.
- CrazyStat 6y ago
  The supply curve is determined to a large extent by costs, so this doesn't seem like as very helpful nitpick.
rahimnathwani 6y ago
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.
- gamblor956 6y ago
  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.
  - rahimnathwani 6y ago
    > VAT is more complicated than sales tax. I'm curious - do you think this extra complexity is necessary (e.g. extra rules to reduce unintended effects), or is it implementation-specific? > The simplest form of consumption tax is the > (Australian) GST: a flat 10% on almost > all goods and services. But isn't Australian GST just a specific example of a VAT system? The Australian government says[0]: "Generally, businesses and other organisations registered for GST will: - include GST in the price they charge for their goods and services - claim credits for the GST included in the price of goods and services they buy for their business." This sounds exactly like a VAT. [0] https://www.ato.gov.au/Business/GST/How-GST-works/ https://www.ato.gov.au/Business/GST/How-GST-works/
    - gamblor956 6y ago
      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.)
asdfasgasdgasdg 6y ago
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.
- chaostheory 6y ago
  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.
  - asdfasgasdgasdg 6y ago
    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.
- labcomputer 6y ago
  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.
dyno-might 6y ago
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: https://www.cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-studies-articles-reports/1903-3073001_cost-ey-sales-tax-on-business-inputs-study_final-5-16.pdf https://www.cost.org/globalassets/cost/state-tax-resources-p...
- russellbeattie 6y ago
  I think your VAT Regime illustration has a mistake. The $2.40 should be $3.60?
  - dyno-might 6y ago
    It looks OK to me. Do you mean the $2.40 in the text or in the table?
    - russellbeattie 6y ago
      Heh. The word "illustration" seemed pretty clear to me. Maybe I should have said, "picture"? "Graphic"? "The thing you drew"?
- deleted 6y ago
  [deleted]
- rgbrenner 6y ago
  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.
dan-robertson 6y ago
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.
- deleted 6y ago
  [deleted]
- deleted 6y ago
  [deleted]
- dyno-might 6y ago
  I can't imagine anyone would care, but if you'd like, you're welcome to browse the full commit history! :) https://github.com/dyno-might/dyno-might.github.io/commits/master/_posts/2020-12-09-sales-tax-creates-more-unnecessary-pain-than-value-added-tax.md https://github.com/dyno-might/dyno-might.github.io/commits/m... 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.)
  - dan-robertson 6y ago
    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.”)
seancoleman 6y ago
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).
mmcconnell1618 6y ago
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.
- jccooper 6y ago
  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.
sbuttgereit 6y ago
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.
secondcoming 6y ago
If you can claim the tax back what's the point in charging it?
- gotorazor 6y ago
  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.
gnicholas 6y ago
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.

gowld 6y ago

> What he also misses: is that if I sell something to another retailer for resale , I don't charge him sales tax on the entire purchase. This is covered in the article: "a retailer usually won’t pay sales tax on a manufactured good they intend to a consumer in the same form."

rgbrenner 6y ago
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.
- sumtechguy 6y ago
  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.
deleted 6y ago
[deleted]

jmole 6y ago

Where can you file for sales tax reimbursement? Essentially all online resale sites (eBay, Reverb, etc.) are charging sales tax on secondhand goods. So if I buy something, then sell it later, that first purchase should be considered a "resale" purchase, right?

pionar 6y ago
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.
- asdfaoeu 6y ago
  Is that all states? That just sounds like VAT
  - Tagbert 6y ago
    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.
  - rahimnathwani 6y ago
    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.
    - gamblor956 6y ago
      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.

ghgdynb1 6y ago

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.

camhart 6y ago
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.
- joshspankit 6y ago
  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.
  - eganist 6y ago
    Would be interesting to automate retrospective analysis across every comment posted on HN and chart language trends over the years.
- jdxcode 6y ago
  people have been saying this ever since I joined HN in 2009
  - jaxn 6y ago
    And throughout those years, HN has remained the most constructive discussion of any slice of the internet I visit.
deleted 6y ago
[deleted]

giantg2 6y ago

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.

dan-robertson 6y ago
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.
- giantg2 6y ago
  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.
  - dan-robertson 6y ago
    Did we read the same article? 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)

megiddo 6y ago

He also confounds costs with prices. Costs are not a significant factor in the prices of market goods - that is dominated by supply and demand.

CrazyStat 6y ago
The supply curve is determined to a large extent by costs, so this doesn't seem like as very helpful nitpick.

rahimnathwani 6y ago

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.

gamblor956 6y ago
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.
- rahimnathwani 6y ago
  > VAT is more complicated than sales tax. I'm curious - do you think this extra complexity is necessary (e.g. extra rules to reduce unintended effects), or is it implementation-specific? > The simplest form of consumption tax is the > (Australian) GST: a flat 10% on almost > all goods and services. But isn't Australian GST just a specific example of a VAT system? The Australian government says[0]: "Generally, businesses and other organisations registered for GST will: - include GST in the price they charge for their goods and services - claim credits for the GST included in the price of goods and services they buy for their business." This sounds exactly like a VAT. [0] https://www.ato.gov.au/Business/GST/How-GST-works/ https://www.ato.gov.au/Business/GST/How-GST-works/
  - gamblor956 6y ago
    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.)

asdfasgasdgasdg 6y ago

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.

chaostheory 6y ago
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.
- asdfasgasdgasdg 6y ago
  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.
labcomputer 6y ago
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.

dyno-might 6y ago

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: https://www.cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-studies-articles-reports/1903-3073001_cost-ey-sales-tax-on-business-inputs-study_final-5-16.pdf https://www.cost.org/globalassets/cost/state-tax-resources-p...

russellbeattie 6y ago
I think your VAT Regime illustration has a mistake. The $2.40 should be $3.60?
- dyno-might 6y ago
  It looks OK to me. Do you mean the $2.40 in the text or in the table?
  - russellbeattie 6y ago
    Heh. The word "illustration" seemed pretty clear to me. Maybe I should have said, "picture"? "Graphic"? "The thing you drew"?
deleted 6y ago
[deleted]
rgbrenner 6y ago
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.

dan-robertson 6y ago

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.

deleted 6y ago
[deleted]
deleted 6y ago
[deleted]
dyno-might 6y ago
I can't imagine anyone would care, but if you'd like, you're welcome to browse the full commit history! :) https://github.com/dyno-might/dyno-might.github.io/commits/master/_posts/2020-12-09-sales-tax-creates-more-unnecessary-pain-than-value-added-tax.md https://github.com/dyno-might/dyno-might.github.io/commits/m... 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.)
- dan-robertson 6y ago
  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.”)

seancoleman 6y ago

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).

mmcconnell1618 6y ago

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.

jccooper 6y ago
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.

sbuttgereit 6y ago

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.

secondcoming 6y ago

If you can claim the tax back what's the point in charging it?

gotorazor 6y ago
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.

gnicholas 6y ago

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.