Because America is a democracy, taxes are inevitable, and each person must pay to support government programs. The how and why you do so, however, depends to some degree on a citizen's life choices. For instance, ideally, the rich should be taxed at a higher rate than the poor, and certain behaviors should be rewarded with tax breaks or punished with higher taxes.
On a national level, these ideals are imposed by U. S. Federal Tax Law through income and corporate taxes and enforced by the Internal Revenue Service. On a state level, citizens are compelled to support the government through state income and corporate taxes or indirect taxes, such as the sales and excise taxes, the latter of which includes ad valorem taxes.
Basics of Indirect Taxes
An indirect tax is imposed on the interim products and factors of production of the final products or services a consumer buys. The tax is paid by one or more manufacturers or suppliers as a product or service is produced. It's then passed to consumers as an increase in a product or service price.
While the consumer pays the tax(es), the percentage of a purchase price that results from the tax(es) is not readily apparent to the buyer. The nature of a supply chain, whereby multiple companies and numerous parts and services contribute to the creation of a final product, is the origin of this lack of transparency.
An example of this shift in the tax burden relates to the price of bread. While a consumer doesn't pay a direct tax when he purchases a loaf of bread, product costs, including production and delivery costs and the related taxes, are a key element the bread manufacturer's pricing strategy.
Read More: Types of Indirect Taxes
Exploring the Excise Tax
The excise tax, which is levied by a federal, state or local government, is an indirect tax collected by a business and then forwarded to a taxing authority every quarter. Every excise tax is either an ad valorem tax or a specific tax. Whereas the specific tax is a fixed amount that's levied on a certain product, an ad valorem tax is a fixed percentage of the value of a transaction or an assessed property value.
Read More: Who Pays Excise Taxes?
Understanding Ad Valorem Tax
An ad valorem tax is based on the value of a transaction or a piece of property and, therefore, is proportional to the fair market value or assessed value of the underlying asset, such as land or a mobile home. Local property taxes and other ad valorem taxes are often assessed on an annual basis. A tax assessor may determine an asset's value, and this assessed value is then used to calculate the tax due. Typically, an ad valorem tax represents a percentage of the fair market value of the relevant asset.
An ad valorem tax law may state the maximum percentage that a tax assessor-collector can use to calculate the tax due for a property or the maximum tax that must be paid. Ad valorem tax laws also state the circumstances in which a tax rate or another factor of the assessment can be made.
Taxes and fees are imposed by the United States federal, state, county and local governments for many reasons. Some of these taxes, such as the ad valorem tax, are indirect, meaning that they're originally imposed on interim products or factors of production, paid by the respective manufacturer or supplier, then passed on to the consumer in a product's price. The ad valorem tax is one such tax that's imposed as a fixed percentage of the value of a transaction or an assessed property value.
- Washington Post: The Constitution’s financial terms, part III: Direct and indirect taxes
- IRS: Tax Code, Regulations and Official Guidance
- USA.gov: Do You Need to File a Tax Return?
- IRS: Tax Information For Corporations
- Internal Revenue Service: Home
- Tax Foundation: State Individual Income Tax Rates and Brackets for 2020
- Investopedia: Indirect Tax Definition
- Corporate Finance Institute: What Are Indirect Taxes?
- IRS: Excise Tax
- Investopedia: Excise Tax Definition
- Bankrate: Ad Valorem Taxat
- Cornell: Ad Valorem Tax
- Cornell: Real Property
- Merriam-Webster. "Ad Valorem." Accessed June 24, 2020.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.