In the United States, the Constitution is both the source of government powers and the limiter of those powers, the latter of which ensures that the rights of U.S. citizens are protected. As such, the Constitution resolved issues that were formerly decided by each individual state. For instance, the "direct tax" settled the question of how much each state would contribute to the operation of the federal government.
Direct tax includes capitations – taxes paid by every person – and land and property taxes that include taxes on wealth, property, businesses and income, which are based on a taxpayer's individual characteristics such as income. In contrast, an "indirect tax" such as the sales tax, is one that's levied on a transaction irrespective of the buyer or seller's circumstance.
Basics of Indirect Taxes
The indirect tax is imposed on an interim product or factor of production and is paid by a manufacturer or supplier. The tax is passed to the consumer in the form of an increase in a consumer price. While the consumer pays the tax, its amount is not readily apparent to the buyer.
The lack of transparency as to the source of the tax is due to the nature of a supply chain, whereby multiple companies contribute to the creation of a final product or service that the consumer buys. During the inter-industry transactions that occur in the supply chain, the payer of the tax shifts from one stage of the supply chain to the next and one vendor to the next. Likewise, the price of interim product increases stage by stage to account for the added tax expense.
An example of the shift of the tax burden occurs in the food industry. No tax is directly imposed on food. There is, however, an indirect tax on food that a buyer consumes due to the cost of direct taxes that occur during a food product's production and delivery that passes from one participant to the next in the food production and distribution process, and finally to the buyer.
Paying Sales Tax
Forty-five states and the District of Columbia impose a tax on the sale of goods and services as a means to fund government services, including the operations of schools and universities and court systems. Equally important, the sales tax can be used as an economic lever to increase demand during a recession. Counterintuitive though it may be, the announcement of a future hike in a sales tax encourages consumption in the near term.
A sales tax is imposed on a sale transaction during the purchase of commodities such as household goods and clothing. The seller of a product collects the tax from the consumer at the point of purchase, records the tax paid, then forwards it to the state or local government at regular intervals.
In 2020, the California state sales tax of 7.25 percent is the nation's highest. Other states, including Indiana, Mississippi, Rhode Island and Tennessee, impose a 7 percent tax. The sales tax in Minnesota, Nevada and Washington are 6.875 percent, 6.85 percent and 6.5 percent, respectively.
Paying Excise Tax
An excise tax, which is essentially a business tax, is levied by a federal, state or local government. A business charges and collects an excise tax and then forwards the collected funds to a taxing authority on a quarterly basis.
Each excise tax is either an ad valorem tax or a specific tax. An ad valorem tax is a fixed percentage of the value of a transaction or an assessed property value. In contrast, the specific tax is a fixed amount of tax placed on a particular good.
Whereas a specific tax may be levied on cigarettes, gasoline, and beer, a government may issue an excise tax on firearms and airline tickets. For instance, in 2020, the Federal Aviation Administration imposes a 7.5 percent excise tax in the form of a passenger ticket tax on airline tickets. So, an airline collects $26.25, or a 7.5 percent excise tax, for each $350 passenger ticket it sells. In contrast, in 2020, the government imposes a $0.183 per gallon specific tax liquified petroleum gas, or propane.
Read More: Who Pays Excise Taxes?
Paying Customs Duty
A customs duty is a tax or tariff that a government imposes on a good when it's transported across the country's international borders. The tariff protects the country's economy, jobs, environment and so on by controlling the flow of goods into and out of the country.
The customs duty rate is a percentage of the total price paid for a good in a foreign country. In general, imposed tariffs are determined by the Harmonized Tariff System of the United States, a manual that states the applicable tariff rates for any product that's imported into the United States.
United States federal, state, county and local governments impose taxes and fees on a variety of businesses, goods and services for many reasons. A large number of them are indirect taxes that are imposed on interim products or factors of production, paid by the respective manufacturer or supplier and then passed on to the consumer in a product's price. One such indirect tax is the one that the U. S. government imposes on manufacturers responsible for carbon emissions.
- Whitehouse.gov: The Constitution
- The Washington Post: The Constitution’s financial terms, part III: Direct and indirect taxes
- Georgia State University, Andrew Young School of Policy Studies: Direct versus Indirect Taxation: Trends, Theory and Economic Significance
- Investopedia: Indirect Tax Definition
- KelloggInsight: How Raising the Sales Tax Could Help Fight a Recession
- CFI™: What Are Indirect Taxes?
- IRS: Excise Tax
- U.S. Customs and Border Protections: Customs Duty Information
- Govinfo.gov: Present Law and Background Information on Federal Excise Taxes
- IRS: Quarterly Federal Excise Tax Return
- Tax Foundation: State & Local Sales Tax Rates, 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.