Date 17 April 1942
Author unknown
Title Outline of the Important Desirable Characteristics of a Federal Retail Sales Tax
Description Staff memo, Division of Tax Research, Treasury Department
Location Box 44; Papers of Roy Blough; Harry S. Truman Presidential Library, Independence, MO.


It is intended that a Federal retail sales tax apply to all sales of tangible personal property to consumers and to all services rendered to consumers, excepting those specifically exempted. It is not intended that he sales tax apply to tangible personal property and services sold to business enterprises and used by them in conducting their business operations. It is recognized that some tangible personal property and services are purchased both by consumer and business enterprises. In these cases it is intended that such articles and services be taxed only when sold to consumers and that they be exempted when sold to business enterprises, provided the firms prove to the satisfaction of the Commissioner of Internal Revenue that such goods and services are to be used only for business purposes.

It is intended that the tax shall apply to the sales of second- hand or used articles when sold by dealers to consumers. Incidental sales of used articles by one individual to another are exempted.


Taxpayers shall include all registered persons selling and leasing tangible personal property and services at retail to consumers. All firms making taxable sales will be required to register. It is intended that the registration be permanent and not annual. A nominal registration fee will be charged to cover paper work. All taxpayers will be required to make monthly tax returns.

Persons under contract to produce, install and deliver goods and services to consumers shall be deemed to be selling at retail, shall be registered, and shall be liable for collection of tax on the fair sales price of the goods and services.


It is intended that the retail sales price of taxable articles and services to which the tax attaches shall be the full purchase price paid by the consumer, excluding the amount of State and local retail sales tax when stated as a separate charge. There shall also be excluded from the sales price the Federal retail sales tax.

There shall be included in the sales price any charge for coverings and containers of whatever nature and any charge incident to placing the article in condition for consumption, including charges for transportation, delivery, financing, insurance, installation, or any other charge by the vendor, his agents or affiliates whether quoted separately or not from the sales price.

Installment and conditional sales shall be deemed sales at retail, whether or not title passes, and the full amount of the tax shall be collected at the time of sale or delivery and not at the time of payment by the consumer.

Leases shall be deemed sales at retail and tax shall be paid on the basis of each payment.

The Commissioner shall determine the fair price in those cases involving leases, trade-ins, production for use and not for sale, and where sales are not at arm's length or where there is no bona fide sale.


It is not intended to introduce a system of differential tax rates at this time, since there appear to be no good fundamental principles for group tax rate differentiation. The determination of differential tax rates on groups of articles appears to rest largely on political and social policies.


a. Articles sold to governments and their agencies.

b. Articles exported or sold for export.

c. Articles such as liquor and cigarettes already subject to heavy excises. Some articles now subject to excises, especially those whose production has been terminated or drastically curtailed would be repealed, but these articles would be subject to sales tax.

d. The services of banks, building and loan companies, and insurance companies.

e. The services of domestic servants and labor services performed for consumers by other than established commercial enterprises. Thus the work of a gardener would be exempted; the work of a firm engaged in landscape architecture would be taxed.

f. Leases and rentals of houses, apartments, offices and business properties not including charges made to transient lodgers for hotel and tourist accommodations.

g. The services of dentists, doctors, including specialized types of practices, nurses, and hospitals, and specialized equipment made for and intended for use by dentists, doctors, and hospitals.

h. Services rendered by ministers, and instructors of regularly organized classes, and by educational institutions.

i. Charges for transportation services rendered by local mass- transportation systems within a city and surrounding suburban territory, including commutation tickets issued by railways and bus lines. Taxicab services are not exempt.

j. Incidental sales of taxable articles and services by unregistered individuals not in the business of selling at retail.

k. Sales of articles and services to business firms for use in the operation of the business. The purchaser must provide satisfactory proof that the articles and services are to be used exclusively for business purposes.

NOTE 1: Exemption of foods, clothing, and medicines would render the tax less regressive but would cut the yield substantially. No recommendation is made at this time as to whether or not any of these articles should be excluded. Factors to be mentioned in regard to the desirability of these exemptions are: whether or not a withholding tax or compulsory savings program is introduced, whether or not the social security taxes are extended in scope and raised in rate, and the extent to which income tax exemptions are lowered.

There are certain specific recommendations to make, however:

a: If, for example, foods as a group are exempted, the term "food" should be defined carefully to exclude borderline cases such as carbonated beverages and candy. An alternative approach is to specify exactly which foods are to be exempted.

b. If, in addition, medicines are exempted, the exemption should apply to prescriptions only, not to patent medicines.

NOTE 2: Administrative exemptions such as those excluding firms doing business under a certain amount are not recommended.

6. PROVISIONS RELATING TO SHIFTING a. The taxpayers must quote the tax to consumers separately from the price of articles and services and also show the tax separately on invoices.

b. The Treasury shall issue tokens, out of plastic, to be used in payment of tax involving fractions of a cent. Paper may be used if suitable plastics are scarce.

c. It is recommended that no provision be made to require the taxpayer to shift the burden of the tax to consumers.


Tax refunds and credits shall be allowed only for refunded articles and not for repossessions. The amount of refund or credit shall be computed on the actual value or amount of refund allowed the final consumer.


The sales tax shall be deductible by licensed taxpayers in determining income and excess profits tax liability only when the amount of tax collected and paid to the Federal Government is included as gross income.