Tax Analysts Blog

Note to Everyone: Business Should Not Pay Sales Tax

Posted on Dec 5, 2012

The New York Times ran a series highlighting the breadth and depth of state tax incentives. It was a terrific set of articles. But they contain one serious flaw. The articles list sales tax exemptions of business as incentives. The articles further imply that such exemptions are bad tax policy. But such statements prove that even the New York Times gets it wrong sometimes. The sales tax should be paid by consumers. As a general rule, business inputs should never be subject to sales tax. Everyone who has ever studied consumption taxes knows this. Indeed, the most widespread consumption tax in the world, the value added tax, is built specifically so that businesses do not pay the tax.

Only bad things happen when businesses pay sales tax. First, the businesses paying the tax pass the burden on to their customers in the form of higher prices. But the tax is hidden. People do not know they are paying it. Politicians, and perhaps the New York Times, may like that lack of transparency, but it is awful government policy. Second, the higher priced products purchased by consumers are often subject to tax. This gives rise to a tax on a tax. That is awful tax policy. Finally, taxation of business inputs artificially keeps sales tax rates low. People think the sales tax rate is lower than it actually is. None of this is good.

The New York Times and everyone else for that matter, should be applauding the states that exempt business purchases from sales tax. Instead, they are buying into the asinine idea that taxing businesses will somehow promote progressivity. That is just not true.

Read Comments (3)

Rusty SteeleDec 4, 2012

Under a properly designed consumption tax (which is what a retail sales tax is)
the burden of the tax should never fall on businesses. The burden must pass to
the final consumer. Failure to achieve that result is a serious defect.

That is not a liberal/conservative thing; it's a logic thing. It is not some
kind of special tax perk for Corporate America to say business inputs should be
exempt from the RST.

Folks who don't get that idea fundamentally misunderstand the concept of
consumption taxation.
[If one is compelled to 'stick it' to big business, fine, do it some other way.
Attempting to do it through the guise the RST is nonsensical.]

Unfortunately, there is abundant evidence that a large percent of the RST
burdeon does indeed fall on business. That's because the RST, truthfully, is a
poorly designed tax. The RST also fails to reach the service sector, which
isn't terrible useful in a modern service economy. The RST is pathetic as far
as revenue tools go.

If one wishes to tax consumption properly, the answer is VAT.

More than 150 countries around the world have already figured this out and
replaced their backwards RSTs with VAT/GST regimes. And each of those countries
is much better for it. Note that NONE of those countries are talking about
dropping VAT/GST and reverting back to their ugly and inefficient RSTs. There's
a good reason for that.

bill lockDec 11, 2012

Thank you. I agree. I was wondering when someone would take the NYT to task
for their ignorant, or perhaps naive point of view on tax policy.

John MikesellDec 11, 2012

Agree very much. I emailed the author of the NY Times story to make the point
but, of course, I received no response.

But here is a problem: American business leaders are so ignorant of tax systems
that they believe that a VAT is a tax on business and oppose on that basis.

How can business leaders and journalists be taught the fundamentals of tax
policy?

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