Date 26 August 1943
Author unknown
Title Considerations Respecting a Federal Retail Sales Tax
Description Staff memo, Division of Tax Research, U.S. Treasury Department
Location Box 1; General Sales Taxes; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.
 

CONSIDERATIONS RESPECTING A FEDERAL RETAIL SALES TAX

I. Considerations Affecting the Choice Among Various Types of Sales Taxes

II. Considerations on the Scope of a Federal Retail Sales Tax

III. Retail Sales Tax Base and Yield

IV. Administration of a Retail Sales Tax

V. Relation of a Federal Retail Sales Tax to the Government's Anti-inflation Program

VI. Summary of State Sales Taxes

VII. Summary of Central Government Sales Taxes in Canada, Australia, and the United Kingdom [editors note: section missing]

Division of Tax Research, Treasury Department
Washington. D.C.
August 26, 1943

Part I

Considerations Affecting the Choice Among Various Types of Sales Taxes

The term sales tax ordinarily refers to the "general sales tax" which is a levy on the sale of a wide variety of goods and services. Although some writers use the term to refer also to taxes on the sale of particular commodities, these taxes are more commonly called "selective sales taxes" or "excises."

There are several varieties of general sales taxes. Some apply to the sale of a commodity each time it changes hands; these are commonly called "turnover" or "transactions" taxes. More frequently, however, sales taxes are of the "single stage" type, applying to the sale of a commodity only once as it passes through production and distribution channels and into the hands of consumers. The widespread preference for single-stage sales taxes is due principally to the fact that multiple-stage sales taxes discriminate against non- integrated industrial systems. A tax which applies at more than one stage in the production-distribution process encourages business integration and places small independent concerns at a competitive disadvantage, Moreover, a multiple-stage tax at the present time would create unmanageable problems in wartime price stabilization.

Single-stage sales taxes are of three types, depending on whether they apply at the manufacturers', wholesale, or retail level. The choice among these three types depends upon the careful balancing of the many conflicting economic, administrative, and political factors involved. These factors are examined in the attached memorandum and the three forms of single-stage sales taxes are listed in the order of their superiority with regard to each of the considerations indicated.

Attachment: Considerations involved in choice among manufacturers' wholesale, and retail sales taxes

The case for any one of the three types of single-stage sales tax -- manufacturers', wholesale, or retail -- is not clear-cut and only by careful consideration of all merits and disadvantages of the three types can a satisfactory choice be made. In the following outline the three types of tax are listed in order of their superiority in regard to the various considerations indicated, The explanations are brief and not intended to be exhaustive.

I. Economic and social considerations

A. Least interference with price control

1. Retail 2. Wholesale 3. Manufacturers'

Explanation: Only with a retail tax can a sales tax-be introduced without creating a tremendous task for O.P.A. in administering price ceilings. Revision of price ceilings because of the tax can be avoided only by separate quotation of the tax; such quotation is not feasible in the case of wholesale and manufacturers' taxes because margins of merchants could be revealed by separate quotation under such taxes. With a retail tax, the only source of difficulty arises out of the inability to exclude all cost goods from the tax.

B. Least inflationary tendencies

1. Retail 2. Wholesale 3. Manufacturers'

Explanation: A retail tax involves least pyramiding; lowest rate applying to sales to business users, if the same tax revenue is to be raised in each case; and least interference with price control. A wholesale tax is preferable in these respects to a manufacturers' tax.

C. Avoidance of excess burden on consumers arising out of pyramiding

1. Retail 2. Wholesale 3. Manufacturers'

Explanation: The nearer the tax is placed to the final sale to the consumer, the less opportunities are there for merchants to raise prices by amounts greater than the tax through application of more or less constant mark-up percentages. If price control is effective, there would be few opportunities for pyramiding under any type of sales tax.

D. Extent to which tax burden on consumers is distributed uniformly among all taxable articles purchased

1. Retail 2. Wholesale 3. Manufacturers'

Explanation: because the total margins of distributors between manufacturer and consumer are not uniform in the case of different goods, the manufacturers' and wholesale sales taxes represent non- uniform percentages of retail selling price. Because, in general, the margin is greater on luxuries than on necessities, the retail tax may be less regressive than the other forms.

E. Extent to which consumer services can be included in the tax base

1. Retail 2. Wholesale 3. Manufacturers'

Explanation: Because consumers' services are necessarily rendered at the retail level and do not pass through manufacturing and wholesale stages, they can be taxed most satisfactorily by a retail tax. There is no substantial difference in the feasibility of taxing services under wholesale and manufacturers' taxes.

F. Extent to which incompleteness of coverage can be avoided

1. Retail 2. Wholesale 3. Manufacturers'

Explanation: Under manufacturers' and wholesale taxes, articles sold by farmers to retailers and most secondhand goods escape tax because they do not pass through the hands of taxpayers. Under a retail tax such sales are taxed. There is virtually no difference between wholesale and manufacturers' taxes in this respect.

G. Extent to which exemptions can be made without impairing administrative efficiency

1. Manufacturers 2. Wholesale 3. Retail

Explanation: The smaller number of concerns at the manufacturing and wholesale levels and the more adequate records kept by manufacturers and wholesalers make provision of desired exemptions more feasible at these levels than at the retail level.

H. Greatest yield from a given tax rate

1.Retail 2. Wholesale 3. Manufacturers'

Explanation: The nearer the retail level the tax applies, the greater the tax base.

II. Administrative considerations

A. Smallest number of taxpayers

1. Manufacturers' 2. Wholesale 3. Retail

Explanation: The number of retailers is far greater than the number of wholesalers or manufacturers; the number of manufacturers is less than the number of concerns selling at wholesale.

B. Smallest personnel force required for administration

1. Manufacturers' 2. Wholesale 3. Retail

Explanation: The smaller number of taxpayers under manufacturers' and wholesale taxes results in a smaller requirement for administrative personnel in the case of these two taxes than in the case of the retail tax.

C. Ease of identification of taxpayers for licensing purposes

1. Retail 2. Manufacturers' 3. Wholesale

Explanation: Identification of firms seeming at retail is easier than identification of manufacturers or wholesalers.

D. Ease of determining taxable transactions

1. Retail 2. Manufacturers' 3. Wholesale

Explanation: Sales can be identified as retail sales much more easily than sales can be identified as manufacturers' or wholesale sales. The latter are particularly difficult to identify because whether or not a sale is a wholesale sale cannot be determined definitely until the subsequent resale of the goods concerned.

E. Avoidance of valuation difficulties resulting from absence of actual or legitimate sale, and diverse nature of taxable sales.

1. Retail 2. Wholesale 3. Manufacturers'

Explanation: In the case of the manufacturers' tax and to a lesser extent the wholesale tax, there are many taxable transactions involving no actual sale or no legitimate arm's length sale. In such cases valuation is necessary to determine taxable sales price. There are far less such transactions in the case of the retail tax. Likewise, manufacturers sell to wholesalers, retailers, and consumers, and wholesalers sell to retailers and consumers, while retailers normally sell only to consumers. When concerns are selling to buyers on different levels of the distribution system, revaluation of the sale price for tax purposes is often necessary.

F. Adequacy of taxpayers' records

1. Manufacturers' 2. Wholesale 3. Retail

Explanation: Manufacturers and wholesalers typically have a much larger volume of business than the average retailers and keep much more adequate records. Many retailers keep virtually no records at all. Manufacturers' records are on the average some-what better than those of wholesalers, and manufacturers typically are more specialized than wholesalers.

G. Extent to which added administrative difficulties due to high rate level can be avoided

1. Retail 2. Wholesale 3. Manufacturers'

Explanation: In order to obtain a given amount of revenue, the tax rate can be much lower with a retail tax than with the other types, and lower with a wholesale tax than with a manufacturers' tax.

H. Closest conformity with Federal tax experience

1. Manufacturers' 2. Retail 3. Wholesale

Explanation: The Federal Government has for a long period of time levied manufacturers' sales taxes but has had very little experience with taxes levied at the wholesale or retail level. During recent years, three Federal excise taxes on the sale of goods and several others on services have been used. There has been virtually no experience with a wholesale tax.

I. Adaptability to Bureau of Internal Revenue practice

1. Manufacturers' 2. Wholesale 3. Retail

Explanation: The Bureau of Internal Revenue excise tax administration machinery is geared to the handling of a shall number of concerns and a minimum of field audit. However, it nay be feasible to integrate the retail sales tax administration with the administration of other Federal levies such as the income tax and the social security payroll contributions.

J. Closes conformity with State experience

1. Retail 2. Wholesale 3. Manufacturers'

Explanation: The states have had substantial experience with retail sales tax some experience with wholesale taxes (especially in the case of the gasoline tax), and a very limited amount of experience with manufacturers' sales taxes.

III. Public relations considerations

A. Insuring maximum State cooperation

1. Manufacturers' 2. Wholesale 3. Retail

Explanation: In general, the State tax administrators probably would prefer to see a Federal Sales tax levied at the wholesale or manufacturing level, to avoid conflicts with their own retail sales taxes. States, however, would be somewhat more able to cooperate with Federal administration if the tax were retail.

B. Insuring maximum taxpayer cooperation

1. Retail 2. Manufacturers' 3. Wholesale /1/

Explanation: In general, the sentiment of business concerns seems to favor a retail sales tax. This is especially true under present conditions, when any other type of sales tax would cause difficulties in connection with price regulation.

FOOTNOTE
/1/ Some business organizations apparently would favor a turnover tax.

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