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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