Sales Tax and Use Tax in the U.S.

Sales Tax and Use Tax in the U.S.

ACCT 631.13

Accounting for Taxes

Dr. H. Drew Fountaine

Team Q: Yafei Liu / Qing Liu / Tianyu Zhao /

Xiaoyi Yang / Lizhe Dang / Yufan Zeng

Sales Tax

Sales tax is a tax paid to a governing body for the sales of certain goods and services.  It is a major source of revenue for most state and local governments. U.S. sales taxes were enacted first in West Virginia in 1921, then in 11 more states in 1933, and 18 more states by 1940.  Now, Alaska, Delaware, Montana, New Hampshire and Oregon are the only five states without sales tax. Except the state level sales tax, consumers will also face local sales tax in 38 states.  Many of the states that have sales taxes exempt food from taxation, a few states have local sales tax even if it is exempt from state sales tax.  Prescription drugs are exempt for all states and locals except Illinois.  In 2014, state government got 23.67% of general revenue from sales tax, and local government got 6.9%.

According to 2017 state rates, California has highest state level sales rate, which is 7.25%, it decreased slightly from 7.5% from previous year because Proposition 30, the schools and local public safety protection act of 2012 expired in December 31, 2016.  Colorado has the lowest state sales rate, which is 2.9%.  For the local rates, Alabama is the highest average local sales tax rates state, which is 5.01%, and next state is Louisiana, which is 4.98%.  After combined these two rates, Louisiana, Tennessee, Arkansas, Alabama are the four states with highest rates, their rates are all higher than 9%. The lowest state is Alaska, which has only 1.76%.

An increasing or decreasing sales tax can immediately be reflected on prices, which will affect consumers’ purchasing power based on the elasticity of demand for different products and services.  A slight sales tax increase could generate huge tax revenue for government budget plan, and create more jobs in public sector.  Also, the increase in sales tax could be a temporary move to help the need of economy recovery (Nicholas, 2011).  As Appendix 1 shows, a temporary increase in sales tax and charge for untaxed consumer services will balance the further cuts in budget (Nicholas & Chapman, 2010).  On the other hand, the lower income groups end up paying more since sales tax is a regressive tax, which is not determined on income level.  The manufactures and small companies have to bear the tax burden and increasing production cost if a higher sales tax is applied (Farnsworth, n.d).

Use Tax

During the 1930s at the height of the Depression when personal incomes were at their lowest, 24 states opted to enact state-level sales taxes in an effort to bolster state revenues (Fox, 2003). The different sales tax rate in each state leads people to cross-border shop in an attempt to reduce, or avoid sales taxes. Cross-border shop would shrink sales tax bases and harm local economic.  In order to avoid this situation states adopted a complement to the sales tax called the use tax.

The development of use tax stems from the purchase of tangible property for personal use by an individual whose business operation and related functionalities are based in the state that levies the tax.  Regardless of the origin of the purchase of the given products, the requirement to meet the obligation of use tax would still be warranted.  The significance of the use taxes is the desire to discourage the purchasing of products that are not liable for taxation draw from sale within the jurisdiction of the state (Godfrey, 2015).  The purchases that are conducted by out-of-state vendors that lack the mandate to collect tax on the items translate to the requirement that use tax is to be levied.

The rate of assessment of the use tax is similar to the rates at which the sales tax is owed to the state.  The use tax complements the general sales tax and is due on transactions in which the sales tax is not paid or is paid at a lower rate. Of the 45 states, which have sales and use taxes, 38 states also have individual income tax. Of these 38 states, 27 provide for taxpayers to report use tax obligations on the individual income tax return, and six provide information about the use tax in the individual income tax booklets. The states that note use tax requirements in the income tax booklet but do not provide a reporting line are Arizona, Colorado, Iowa, Minnesota, Missouri, and North Dakota (Appendix 2).