|FEDERAL RETAILERS', WHOLESALERS' AND MANUFACTURERS'
Table of Contents A. Structure of the taxes 1. Scope 2. Taxpayers 3. Tax rates 4. Tax bases 5. Exemptions B. Estimated tax bases and taxpayers, 1935 C. Equity considerations 1. Under a manufacturers' sales tax 2. Under a wholesalers' sales tax 3. Under the retailers' sales tax D. Effect on consumer prices 1. Incidence 2. Multiple taxation 3. Pyramiding E. Distribution of sales tax burden F. Administrative problems 1. Problem of administrative personnel 2. Definitions and uniformity of tax base 3. Definition of "articles for further manufacture" 4. Problems of shifting 5. Registration and licensing
Federal Retailers', Wholesalers' and Manufacturers' Sales Taxes This memorandum compares the principal distinguishing characteristics and technical problems raised by general sales taxes levied at the manufacturing, wholesaling or retailing stages of production and distribution. It is largely factual in character and does not consider directly the question of whether any one of such forms of sales tax should be imposed as alternatives to either selective excise taxes or to other forms of taxation. Inasmuch as there has never been a general sales tax in the Federal tax system (although there was a very comprehensive system of manufacturers' excises during the Civil War), this analysis is predicated on sales tax structures of the types used by States, those involved in the 1932 and more recent Congressional sales tax proposals, and in the Canadian and Australian sales tax laws.
A. STRUCTURE OF THE TAXES
1. SCOPE. A Federal sales tax, irrespective of the stage of production or distribution at which the tax might be imposed, probably would approximate a single-stage tax and, as such, would be limited to sales of tangible personal property when in a form packaged and labeled ready for shipment or delivery to final users and consumers. This is the scope ordinarily considered with respect to Federal manufacturers' and wholesalers' sales taxes, although sales of gases and electrical energy are sometimes included.
State retail sales taxes are applied primarily to sales of tangible personal property although in some cases they also cover services such as public utility, communication, transportation, the operation of places of amusement, and services rendered by hotels, rooming houses, office buildings, parking lots, etc. Some States do not reach any of these categories of service and only a few reach all of them. Generally, personal, professional or repair services are outside the sales tax scope altogether. Thus, although the question arises whether the scope of a retail sales tax should encompass expenditures for services or only those expenditures for tangible personal property, for purposes of comparing the retail form of tax with the manufacturer and wholesaler types, it is assumed that the scope under the three forms of tax encompasses all sales of tangible personal property, unless specifically exempt, when in condition packaged and labeled ready for shipment or delivery to final users or consumers.
2. TAXPAYERS. In accordance with the foregoing concept of scope, the manufacturers' sales tax would be levied on the sales of all manufactured articles sold in the United States by registered manufacturers or producers and by registered dealers and importers, unless such manufactured articles and manufacturers are specifically exempt.
The wholesalers' sales tax would attach at the point of sale at wholesale. Since persons other than wholesalers sell at wholesale, the definition of taxpayer under the wholesalers' tax would also include manufacturers, importers, and retailers.
The retailers' form of sales tax would be imposed at the point of sale at retail, and, in addition to retailers, the taxpaying group would include importers, wholesalers, and manufacturers.
3. TAX RATES. Under any one of the three types of sales taxes the tax rate, especially at the start, should be relatively low because of (1) Federal inexperience with a general sales tax and the great additions to administrative personnel that would be required, (2) the likelihood that a relatively high tax rate would work hardships due to the complexity of the economy, and (3) the probability of a greater amount of litigation under a high tax rate than under a low one.
A lower tax rate would be required to obtain a given amount of revenue from the retailers' tax than from the wholesalers' tax and the manufacturers' tax because of the differences in sales prices at the different stages of production and distribution. For example, it is estimated that, in 1935, $1 billion of revenue could have been raised by a retailers' tax of 2.3 percent, or a wholesalers' tax of 2.6 percent, or a manufacturers' tax of 3.3 percent, assuming that articles for further manufacture and for resale to persons other than final users and consumers were exempt and that taxpayers with annual sales of less than $5,000 also were exempt. 4. TAX BASES. Under any one of the three types of taxes, the tax should apply to the sales price of the article in a finished form ready for shipment or delivery to the final user or consumer. The sales price for tax base purposes should include any charge for coverings and containers of whatever nature, and any charge incident to placing the article in condition packed and ready for shipment to the final user or final consumer.
Finished articles imported for resale probably would be taxed on the sales price at the time of resale to final users and consumers, and those imported for use on the import values determined for customs duty.
5. EXEMPTIONS. The purpose of a single-stage sales tax is to avoid multiple taxation. Under a manufacturers' sales tax, this requires provision for tax-free sales of articles for further manufacture. The wholesalers' sales tax requires, in addition, the exemption of sales at wholesale of finished articles for resale to retailers or to persons other than final users or consumers. The retailers' sales tax also would require the exemption of articles for further manufacture and articles for resale to persons other than final users or consumers.
As under the manufacturers' excises, exemption probably would also be accorded sales for export, sales for shipment to United States' Possessions, sales of certain supplies for use on certain vessels and foreign aircraft, articles produced by Indians, and articles sold to governments and their agencies. In the aggregate, these exemptions would reduce the size of the tax bases appreciably. Of particular importance are the great increases in Federal purchases expected during the war emergency period.
Articles already subject to manufacturers' excises might be exempt from a general sales tax, irrespective of the form of general sales tax, if the latter were levied at a moderate rate. If a general sales tax were to be levied at a low rate (1 or 2 percent) and, at the same time, the need for additional revenue is great, it is possible that a general sales tax might be levied in addition to existing excises. If a general sales tax is levied at a higher rate than the existing excise rate on an article, it should supersede the manufacturers' excise with respect to that article, unless undesirable economic repercussions are likely.
The problem of determining what articles (such as foods, clothing, and drugs) should be exempt from a general sales tax is most difficult, and, due to the lack of experience and study, the answers may more often than not rest on historical precedent and opinion or political pressures. In general, the scope of exemptions can be expected to vary inversely with revenue needs. The regressivity of sales taxes indicates that expenditures of low-income consumers for articles necessary for their health and welfare should be protected. From the public health standpoint, the need for more adequate diets in the lower-income groups is paramount and supersedes the need for revenue from this source. This points to the exemption of foodstuffs.
The exemption or other favored treatment of specific articles raises administrative problems of determining which of the closely related articles may be excluded from or included under a reasonable definition of the exempt article. For example, in the administration of the exemption of foods under some State retail sales taxes, it has been found necessary to list in detail items of food and the brand names of many items that are to be regarded as foods and those that are not. The administrative experience under the Australian wholesalers' sales tax has been similar to that under the State retail sales taxes. There, a special act pertaining only to exemptions (also listing brand names) has been passed.
Under the manufacturers' and wholesalers' taxes, it probably would be desirable, from the administrative point of view, to exempt those with annual gross sales of less than $5,000. The 1937 Census of Manufactures data indicate that an exemption of $20,000 under the manufacturers' tax probably would reduce the number of taxpayers by 30 percent and the tax base by not much more than 1 percent. Under a wholesalers' tax, the $20,000 exemption probably would eliminate about 35 percent of the taxpayers and less than 5 percent of the tax base, according to the 1935 Census of Business data.
The administrative exemption of small taxpayers under the retailers' tax is even more desirable because of the larger number of retailers but not nearly as practicable as under the other two sales taxes because of the greater opportunities for tax evasion and the greater likelihood that the exemption would introduce undesirable competitive disturbances among retailers. At present, of the States with single-stage retail sales taxes, only Michigan provides for the exemption of small retailers -- those with annual sales of less than $600. All retailers, however, must file reports whether or not their sales are less than $50 per month. Thus the administration of the Michigan tax is not simplified and the administrative costs probably are not reduced appreciably.
The 1935 data indicate that the exemption from Federal retail tax of retailers with annual sales of less than $1,000 would reduce the number of taxpayers about 30 percent and the tax base less than 2 percent. A $5,000 sales exemption would reduce the number of taxpayers by 50 percent and the tax base not much more than 3 percent. However, a $5,000 sales exemption would introduce inequalities among competitors in certain retail lines. For example, in the candy and confectionery trade, 65 percent of the independent retail stores accounting for 24 percent of the sales reported annual sales of less than $5,000 in 1935. A $20,000 retail sales exemption would reduce the tax base about 17 percent, and, no doubt, would also introduce many inequalities among competitors, but the number of taxpayers would be reduced about 80 percent.
B. ESTIMATED TAX BASES AND TAXPAYERS, 1935
The size of the tax bases and the number of taxpayers under various assumptions are estimated as follows for 1935:
Tax bases Manufacturers' Wholesalers' Retailers' Description sales tax sales tax sales tax (In billions) 1. Assuming exemption of articles for further manufacture and for resale /1/ /2/ 45.6 2. Assuming the additional exemption of establishments with annual sales of less than $1,000 /1/ /2/ 44.9 3. Assuming the additional exemption of establishments with annual sales of less than $5,000 30.0 38.2 44.0 4. Assuming the additional exemption of establishments with annual sales of less than $20,000 29.7 37.2 37.6 (table continued) Taxpayers Manufacturers' Wholesalers' Retailers' Description sales tax sales tax sales tax (In thousands) 1. Assuming exemption of articles for further manufacture and for resale /1/ /2/ 2,386 2. Assuming the additional exemption of establishments with annual sales of less than $1,000 /1/ /2/ 1,677 3. Assuming the additional exemption of establishments with annual sales of less than $5,000 139 258 1,191 4. Assuming the additional exemption of establishments with annual sales of less than $20,000 97 173 483
C. EQUITY CONSIDERATIONS
General sales taxes can be expected to have very unequal economic effects among taxpayers, for the general application of a constant formula must necessarily induce haphazard and undesirable results. Some of these likely undesirable effects can be foreseen.
1. UNDER A MANUFACTURERS' SALES TAX
The taxing of manufacturers simply on their sales prices would produce inequities, since manufacturers are differently integrated and their sales prices include charges for varying amounts of the production and distribution functions. Less than 50 percent of manufacturers' sales in 1935 were made to industrial users and wholesalers, which sales probably represent the manufacturers' sales price level to which it is desirable to adjust other types of sales. The remainder of the sales by manufacturers were made to their own wholesale branches, to their own retail stores, to retailers, and to household consumers, all of which represent substantially different prices than the f.o.b. prices.
Unless the manufacturers' sales tax is levied on a uniform tax base, such as the f.o.b. price of finished articles packaged and labeled ready for shipment and delivery to final users and consumers, serious changes will occur in the forms of business organization and business transactions in the attempt to avoid unequal taxation. Business organizations will reorganize their integrated production and distribution functions as separate legal entities. Where one company existed before the unequal tax was levied, several will arise, so that there may be under control of the same business organization a manufacturing company, a packaging and labeling company, and a selling company. The transaction prices between subsidiary units will be held forth by the taxpayers as the proper bases of tax. Since such transactions are not arm's-length sales, the administrative problems also will be augmented. Other manufacturers will attempt the contract-manufacturer method of reducing the tax base. These may be bona fide sales and, consequently, not subject to administrative adjustment unless the definition of "manufacturer" is inclusive enough. Small taxpayers may not be able (and others may not be willing) to undertake the apparent legalistic outlets to tax inequality and will suffer competitive disadvantages.
2. UNDER A WHOLESALERS' SALES TAX
The same kind of problem, although of smaller magnitude than under the manufacturers' tax, is encountered under the wholesalers' form of sales tax. However, it appears that a greater homogeneity of sales exists at the wholesale level of sales than at the manufacturers' level of sales f.o.b. plant. In 1935, of the sales of wholesale establishments distributed by classes of customers, about 75 percent were made either to retailers or to industrial users. These sales probably represent the base types to which other types of sales would be adjusted.
3. UNDER THE RETAILERS' SALES TAX
Contrary to popular belief, the retailers' sales tax does not circumvent the problems of tax base uniformity encountered under the manufacturers' and wholesalers' taxes. For example, sales of finished articles to industrial users would be taxed as sales at retail. In 1935, about 43,000 manufacturers made about $11 billions of sales (valued at f.o.b. prices for census purposes) to industrial users. These sales probably were made at prices ranging from f.o.b. plant to door-delivery and some price quotations no doubt would include installation charges. In the same year, wholesalers reported about $10 billions of sales to industrial users. For administrative reasons, finished articles purchased by building contractors, tailors, barber and beauty shops, repair shops, and other service establishments such as laundries probably would be taxed when sold to them, although in many cases such establishments will also be selling articles at retail. Thus the retailers' tax would not attach uniformly at the point of sale of articles at retail to final consumers but would include sales at different levels of production and distribution to industrial users and persons selling taxable finished articles in combination with services. The variations in sales prices of such articles would reflect the embodiment of different amounts of the production and distribution functions, and it can be expected that changes in the forms of business organization and methods of sale would result in the attempt to avoid unequal taxation.
Retail prices to final consumers also do not represent satisfactory uniform bases of taxation, for here, too, undesirable economic repercussions can be expected to occur unless general uniformity of tax base is provided. Transportation and delivery, and other charges for credit, installation, insurance, guarantees and repairs, enter directly or indirectly into every sales transaction. However, great variations exist among competitors, whether they be manufacturers, wholesalers or retailers, in the manner in which these cost elements are included in or excluded from their sales prices. Unless provisions are made for adjustment of these types of differences from a uniform price basis, certain taxpayers may have to change their mode of business or suffer competitive disadvantages.
D. EFFECT ON CONSUMER PRICES
1. INCIDENCE. During a period of rising prices and increasing consumer purchasing power, such as is expected during the defense program, there is a high probability that a sales tax, irrespective of the stage of production and distribution at which it is levied, generally would be shifted forward in the form of higher prices to consumers. However, the prices of different commodities can be expected to respond to a general sales tax in significantly different ways. For example, tax-induced price increase will tend to be smaller in the cases of commodities associated with elastic consumer demands than in cases of commodities associated with inelastic consumer demands. The nominal price of articles sold at custom-fixed prices and "price line" articles may not change at all. In these cases, the shifting of tax to consumers may occur as smaller quantities or cheaper qualities of the articles sold at the custom-fixed price.
2. MULTIPLE TAXATION. The delimitation of multiple taxation is a function of the definition of "articles for further manufacture." Thus, if the definition exempts only articles that enter as "physical parts" of finished articles, then all other articles contributing to the cost of producing and distributing finished articles will be taxed once as finished articles and again as component costs entering into the determination of the sales price of finished articles. Consequently, the accumulated sales tax on any one finished article and the sales price to the consumer would be greater than is indicated by the rate of tax. If it is assumed that the same amount of revenue is to be obtained from any one of the three likely forms of sales tax, the amount of accumulated tax consequent to multiple taxation would depend on the scope of the sales tax and not on the form.
3. PYRAMIDING. The final users or consumers of taxable articles may pay more in increased prices as a consequence of the tax than the Government receives in revenue. Pyramiding differs from multiple taxation in that the latter is an accumulation of tax that the Government receives while the former is a tax-induced addition to a seller's spread or margin that is not received by the Government.
Contrary to popular opinion, pyramiding would occur under the retailer form of sales tax as well as under the other two forms. However, the importance of pyramiding would be relatively less under a retailers' tax than under a wholesalers' tax; and, of course, it would also be relatively less under the wholesalers' than under the manufacturers' tax.
The available data indicate that distributors' margins are relatively rigid and that, consequently, pyramiding is likely to occur. However, pyramiding is not likely to occur along the lines of any predictable pattern with respect to all articles. As a result of uneven tax shifting and pyramiding there would tend to be shifts in the percent of total consumers' income that various articles could command. Changes might also take place in the competitive position of different sellers. Just as in the case of other changes in costs, a period of readjustment would intervene, at the end of which time some industries and sellers would emerge faring relatively better than others.
If a manufacturers' sales tax is levied under economic conditions likely to prevail during the defense program, there is a high probability that pyramiding would attain significant proportions, at least for certain articles, and that some public action designed to reduce pyramiding would be forthcoming. The chances are that pyramiding would attain less significant proportions under the wholesalers' tax. Pyramiding could not be significant under the retailers' tax. In view of the complexity of mark-ups, public control of pyramiding cannot be expected to be effective.