Date 10-13 May 1942
Author unknown
Title Federal Retail Sales Tax
Description Meeting summary
Location Box 44; Papers of Roy Blough; Harry S. Truman Presidential Library, Independence, MO.



Present: Messrs. Martin, Farioletti, Wahrhaftig, Pools, and Due


1. New collection methods, rather than the use of present methods used for other taxes, are essential if a Federal retail sales tax is to be successful.

2. The law must allow for flexibility of administration.

3. The tax shall be a privilege tax on retailers rather than a tax on consumers.

4. The tax shall apply to all sales of tangible personal property except sales for resale, including sales of materials and parts which become physical ingredients of other articles, and except sales of nonreturnable containers, feed, seed, and fertilizer, sales of fuel, and sales of industrial, commercial, and agricultural machinery.

5. Services usually rendered in conjunction with sale of taxable tangible personal property, including repair and fabrication of taxable tangible personal property, rental of taxable tangible personal property, laundry and dry cleaning, and services of barber shops and beauty parlors shall be subject to the tax.

6. All sales to the governments shall be taxed, and all sales by governments which are essentially commercial sales.

7. There shall be no exemptions of specific commodities or of specific groups of purchasers. Sales of nonreturnable containers, feed, seed, and fertilizer, fuel, and commercial, industrial, and agricultural machinery shall be excluded from retail sales.

8. Sales of nonprofit organizations shall be exempt only if the organizations are charitable or educational, and strictly nonprofit, and the sales are incident to the rendering of charity or education. Such exempt sales shall include sales of meals and publications by schools of less than collegiate grade and student organizations and parent-teacher associations of such schools.

9. Casual sales shall be exempted.

10. Gross sales, less deduction for returns and for separately quoted delivery and finance charges, and for other taxes on the sale of goods paid by the retailer in his own or the consumer's behalf, shall be the measure of the tax. No other deductions should be allowable.

11. It is essential that the rate shall be uniform to avoid extreme administrative difficulties.

12. No outright mandatory shifting provision should be included, but rather a general statement to the effect that the retailer is expected to collect the tax from the consumer and to quote the tax separately when feasible.

13. A definite provision to allow agreements with the States for cooperation and some joint administration is desirable.

14. Permanent revokable [sic] nontransferable permits, for which a nominal fee would be charged, should be required for each business establishment, including each unit of a chain system.

15. Returns should be required on a quarterly basis. The administrator should have power to require bond where found desirable.


I. General Principles

A. The tax shall be imposed as a privilege tax on retailers rather than as a tax on consumers, in order to

1. Prevent exemption of sales to certain groups of consumers for constitutional or political reasons. If the tax is imposed on consumers, sales to States would necessarily be constitutionally exempt, and sales to charitable organizations probably would have to be exempted for political reasons.

2. Place definite liability for payment of tax on the retailer.

3. Prevent deduction of the sales tax by consumers from income for income tax purposes. To allow this deduction would reduce Government revenue, and in part make the tax more regressive, since very low income groups would not benefit from income tax deductions and greatest gain would go to those in high income levels.

B. It is essential that entirely new methods of collection be developed, along the lines of those used by such States as California, that have led in sales tax administration, rather than to follow the methods used by the Bureau of Internal Revenue for existing taxes. The present methods are not adequate for a tax of the nature of a retail sales tax.

C. It is essential that the legal structure allow for flexibility of administration, especially for the purpose of promotion of cooperation with taxpayers.

II. Scope

A. DEFINITION OF TANGIBLE PERSONAL PROPERTY: It is essential to define tangible personal property in such a way as to

1. Distinguish it clearly from real property. Difficulties arise, especially in regard to personal property that becomes attached to real property.

2. Distinguish it clearly from intangible personal property.

3. Insure uniform construction throughout the country, despite differences in State laws as to definition of real property. Even within States, in some cases certain types of property are held to be real for certain purposes and personal for others. Uniform construction is essential:

a. To prevent differences in tax liability for Federal sales tax in different States.

b. To avoid claims that these differences violate the "equal protection" concept.


1. It is essential to distinguish carefully between sale and service.

2. Gifts must be distinguished carefully from sales, to prevent avoidance.

3. It is recommended that sales shall be defined to include:

a. Transfer of title by exchange, or barter.

b. Installment and conditional sales, whether or not title passes, provided possession passes.

c. Leases and rentals, licenses to use, consume, or reproduce.

d. Leases of patent rights or of right to use patent rights, to the extent that it is necessary to include these to prevent evasion of the tax on leases of goods. It is not intended to tax legitimate leases of patent rights where no avoidance of the law is intended.

e. Withdrawal from stock for use by the firm of goods purchased for resale; in regard to these it is recommended that --

i. Readjustments be made on an inventory basis, rather than application of the tax entirely on the basis of original intent at time of purchase.

ii. The tax measure shall be the selling price of the goods rather than the purchase price.

Note: In the case of goods bought for a firm's own use and subsequently resold, no valuation problem is involved; readjustments shall be made on a refund basis.

f. Use by a firm of goods which it has produced, there being no sale transaction involved. The Administrator shall be given power to determine fair market value in these cases.

C. DEFINITION OF PERSON: PERSON shall be defined to include

1. individuals

2. copartnerships

3. corporations

4. associations

5. firms

6. joint ventures (such as railroad tariff bureaus)

7. co-operatives

8. estates

9. trusts

10. business trusts

11. syndicates

12. receivers

13. social clubs

14. fraternal organizations

15. those having possession, not ownership, of tangible personal property for sale, including:

a. consignees

b. auctioneers

c. brokers

d. lienors

16. United States 17. States and their political subdivisions

18. Indians -- tribal or otherwise

19. leased departments

20. peddlers, canvassers, etc.

21. florists operating under telegraphic delivery service

22. any other group or combination acting as a unit


1. This definition is of primary importance, since the nature of the definition determines whether or not sales of producers' goods are taxable. In making the decision in regard to this problem, it is considered necessary to regard the Federal retail sales tax as a temporary war measure. Accordingly considerations of revenue and administration must take precedence over other economic considerations which should play a more significant part were the tax to be regarded as a permanent measure. On this basis it would be recommended that retail sales be defined to include all sales other than those made for resale, including sales of second hand goods. Thus sales of producers' goods would be taxed. By following this method, the serious administrative difficulties involved in any system which requires retailers to keep their records in such a way as to show different types of sales are avoided, as well as departure from State practice. A departure of this type would lessen cooperation of the State tax administrations and lead to confusion and expense for the taxpayers, especially in regard to records and returns. However, it must not be forgotten that this method may destroy in part or entirely the anti-inflationary effect of the sales tax and may create extremely serious administrative problems for OPA and WPB. Therefore, before making a final recommendation, it is suggested that the Treasury contact these agencies to get their attitude toward the effect of a sales tax of the nature indicated above on the problem of price control and to discover whether or not they have done any work which might throw light on the significance of a tax on producers' goods on the prices of the finished products and on the inflationary effect of such a sales tax.


As a result of further study of the problem and contacts with OPA and WPB officials, it was finally concluded that all sales of fuel, and sales of commercial, industrial, and agricultural machinery should be excluded from the tax. These exclusions would eliminate from the tax a large part of the more important articles entering into business costs, and greatly reduce the pressure that would be placed on price ceilings by the tax. Administrative efficiency will be reduced somewhat, but the exclusion does not appear to be unworkable. This change will make the Federal tax proposal similar in respect to taxation of capital equipment sales to the Ohio-Michigan type of sales tax discussed below. Experience of these State with exclusion of machinery has indicated, that this type of exemption can be administered, although it does give rise to some difficulties and a certain amount of evasion.

The term MACHINERY would be defined so as to include such articles as railroad freight care and truck trailers not generally considered to be machinery. The exemption would be limited to those types of machinery used primarily for industrial, commercial, and agricultural purposes. Sales of the articles excluded would not be taxed regardless of the nature of the purchaser in particular cases. Machinery not falling within one of these categories would be taxable even when purchased by business firms.

The fuel exclusion would apply to all sales of fuel, regardless of the nature of the purchaser. Any attempt to differentiate between sales of fuel for production purposes and those for consumption purposes would raise serious problems. It would be difficult, if not impossible, to get dealers to determine properly the use at time of sale, and evasion would be inevitable.

2. Assuming that retail sales are defined as indicated above, it is recommended that the component part (physical ingredient) rule be used as a means of delimiting sales for resale. The component-part rule should be modified by the factor of purpose; that is, a good should be considered as becoming a part of a finished product only if it is used in processing with the intent that it shall become a part of the finished product. There are certain closely related problems:

a. By definition if possible, and otherwise by out-right exemption, feed, seed, and fertilizer should be excluded from the scope of the tax. Following the component-part rule, and State procedure, it would be desirable in any event to excluded these items to the extent to which they are used in the production of goods for sale. It is not administratively feasible to tax these goods when sold for use by a farmer in production of goods for his own consumption, and, therefore, they should be uniformly excluded regardless of the purpose for which they are to be used.

b. By definition if possible, otherwise by specific exemption, all containers, including wrapping materials, should be exempted. Most would be exempted anyway under the resale concept and unnecessary administrative difficulties are created by trying to tax the few sales of containers not made for resale.

3. Consideration has been given to two alternate plans, one in which only sales to final consumers would be taxed, excluding from the scope all sales of goods for business uses, and another, comparable to the systems used by Ohio and Michigan, in which certain specified groups of producers' goods are exempted. The first type is by far the most satisfactory from the standpoint of economic considerations, since it alone avoids imposition of the tax at earlier levels in the production process and thus prevents pyramiding, aids in lessening inflationary tendencies, avoids discrimination between new and old firms and insures that the amount of tax borne by the consumers is the same per dollar of sales price on all goods. This method also has the administrative advantages of lessening difficulties created by the tax for price control by O.P.A. and W.P.B. and of avoiding the use of the component-part rule, which is extremely arbitrary and creates many problems of interpretation. Despite these advantages, the plan was considered inadvisable under present considerations (1) because of the difficulties involved in getting retailers to keep records to show taxable and non-taxable sales and to determine the intended use of goods, and (2) because of the need to maintain State and taxpayer cooperation. The Michigan- Ohio system does eliminate some producers' goods from the scope of the tax, but does not eliminate all, nor avoid the need for use of the component-part rule. Likewise under this method, sellers must keep records to show volume of sales of different types of goods, and many problems must arise as to whether or not certain goods belong in taxable or exempt classes. Experiences of those States which have used this method have not been satisfactory.

E. Taxation of service

1. Electricity, gas, and water

The structure of a retail sales tax is inconsistent with a service tax on utilities in that:

a. For the latter it is desirable to elide State rate regulation.

b. In order to subject municipally owned public utilities to the tax, it is preferable to impose the tax directly on the consumers of the service rather than on the municipalities.

It is therefore desirable to separate the problem from the retail sales tax issue. It does not seem advisable to recommend a separate consumers' tax on these utility services at present because of the difficulty in distinguishing between final use of the services by consumers and use in further production. The utility companies would be put to very considerable expense were the obligation of making the separation placed on them. It is not considered desirable to tax all sales of these utility services because of the importance of them as cost items in certain industries. Question was raised of the desirability of taxing sales of coal and fuel oil to business enterprises when electricity and gas are not taxed. It does not seem advisable however to recommend exemption of coal and oil sales. The solution would seem to be the revision of the excise taxes on utility services.

2. Telephone, telegraph, and transportation

These services should be excluded from the tax because of the more adequate treatment provided them by existing excises. Tolls should be excluded because of the difficulty of collecting from many small enterprises, and the fact that many tolls enter into cost of production.

The objection indicated above against exempting certain tangible personal property because of existing excises on the goods does not apply to exemption of utility services for the same reason, since no difficulty exists in regard to distinguishing sales of utility services from taxable sales made by the same enterprises.

3. Services sold in connection with taxable tangible personal property; repairs and fabrication.

Services sold with taxable tangible personal property should be taxable, whether or not separately quoted from the sale price of the article.

Repairs and fabrication are to be included in the tax, although it is recognized that large numbers of casual sales cannot be reached. Since repairs are included, so also are installation charges. Since most of those engaged in the repair of tangible personal property make sales incidental to the service, they are in any case subject to the sales tax; consequently their inclusion will not add tremendously to the number of taxpayers.

Repairs and installations to REAL property are not included because of great administrative difficulties involved in tracking them down. Furthermore, those who provide these services do not usually sell tangible goods in addition to providing the service. The procedure should be to tax the goods sold to these individuals.

4. Laundering, shoe repair, fur repair, washing, ironing, dry cleaning, and related services.

These should be included in the sales tax. They involve fairly large amounts of revenue; the number of small enterprises in these fields is substantial, but most already sell taxable goods.

5. Supply services

Supply services (towels, costumes, etc.) are to be included in the tax.

6. Rental of space

In general rental of space is excluded on the grounds of expense of collection, because of difficulty in locating. Parking lots should be taxed under a special excise.

7. Federal services exclusive of domestic service

Considerable doubt existed as to whether barber shops and beauty parlors, and other personal non-domestic non-professional services ought to be included. The conclusion was to tax them, because of the revenue required, despite the administrative cost of handling large numbers of taxpayers.

8. Personal servants

These are to be excluded from the tax.

9. The following services are omitted: professional, hospital, education, banks, insurance, housing. Hotels are also excluded because of the difficulty of separating transient from permanent residents, business from pleasure, and certain kinds of hotels from certain kinds of apartments.

10. Recreation

This is excluded as a class because most of the individual items in this class are already subject to the excise. Those which are not can better be handled under the excise than under the sales tax.

III. Specific exemptions

A. Sales to and by governments:

1. Sales to governments, State and Federal, and to contractor on government projects: It is recommended that all such sales be taxed. This method is necessary to avoid the administrative difficulties involved when sellers must distinguish in their records and returns between sales to different types of buyers. It is believed that this problem is more serious than that involved in collection of tax revenue with one hand and payment of that amount out in his purchase price of goods bought with the other.

2. Sales by Governments: Those sales which are essentially commercial sales should be taxable; others should not be. The law must be worded to include, as far as the Federal Government is concerned, those sales which are in practice commercial sales, even though considered otherwise by the courts. This procedure is necessary to avoid unfair competition with private enterprise.

     Note: In regard to sales to Government, if political 
           considerations force exclusion of these, the levels to 
           which exemption could be extended are:

     1. Sales to States and local Governments only

     2. Sales to all Governments

     3. Sales to Governments and to cost-plus-fixed-fee contractors

     4. Sales to Governments and to all government contractors

B. Exports and sales to foreign government representatives:

Exemption of these shall be controlled by constitutional considerations.

C. Articles already subject to excises:

These shall not be exempt from the retail sales tax. To exempt such goods creates serious administrative difficulties in that it is impossible to force retailers to distinguish in their records the volume of sales of different commodities. If any adjustment is necessary it shall be made in the excises.

D. Exemption of necessities:

There shall be no exemption of foods, clothing, or other necessities. To attempt to lessen regressiveness by this means creates extreme administrative difficulties in that retailers cannot be made to keep records in such a way as to distinguish between sales of different types of goods. The most that might be done would be to exempt sales of goods under the food stamp plan of the Surplus Marketing Administration. This is not recommended, however.

E. Non-profit organizations:

1. Sales to non-profit organizations shall not be exempted.

2. Sales by non-profit organizations shall be exempted only when

a. The organizations are charitable or educational in character.

b. The organizations meet the requirements of the Federal income tax law as to non-profit.

c. The sales are incident to the provision of charity or education.

Such exempt sales shall include sales of meals and publications of schools of less than collegiate grade and student organizations and parent-teacher associations of such schools. From an administrative standpoint, it is easier to exempt such sales than to attempt to tax them.

Such sales should be excluded by definition if possible rather than outright exemption.

F. Casual sales and sales of small enterprises.

1. Casual sales by those other than business enterprises shall be exempt.

2. There shall be no exemption for small enterprises.


G. Fuel, and commercial, industrial, and agricultural machinery

As indicated above, it is necessary in the interest of efficient operation of the price-control system to exclude from the tax sales of fuel, and sales of commercial, industrial, and agricultural machinery. Sales of these articles should be excluded from retail sales rather than being exempted outright. One unfortunate effect of providing any exemptions is the precedent offered for further exemptions. To the extent that granting of exemptions can be made less obvious by use of other terminology, the danger of granting precedent can be lessened. Essentially exclusion of sales of fuel and machinery does not involve exemption in the usual sense of the term but rather readjustment of retail sales in such a way as to make the tax a single-stage tax so far as possible.

IV. Measure of the tax

A. The basis of the measure of the tax should be gross sales rather than gross receipts, but some readjustments as indicated below are necessary. The basic reason is to insure collection of tax on credit transactions at the time the sales are made, to avoid subsequent difficulties of collection.

B. Gross sales shall include the total sale, lease, or rental price, whether paid in cash, credit, property, or services.

1. No deductions shall be made for the value of trade-ins; when only the net price is quoted, the value of trade-ins shall be added.

2. Installation charges shall be included.

3. Delivery charges shall not be included if quoted separately.

4. Interest, insurance, finance, investigation, and similar charges shall not be included if quoted separately.

5. Gross sales shall not include cash, trade, quantity, and employee discounts taken, or adjustments for defects.

6. Cover charges and tips taken by the management shall be included.

7. All sales taxes (Federal, State, and local) paid to the Government by the retailer in his own behalf as a retailer or on the behalf of the consumer shall be deductible.

C. No allowance shall be made to the seller for his work in collection of the tax.

D. Deductions shall be allowed for returned goods, but not for bad debts or repossessions.

E. Amounts paid for options shall be taxed whether the options are exercised or not. This is necessary to prevent avoidance.

F. The Commissioner shall have power to set the price for tax purposes whenever it appears that the sale has not been at arm's length or for any other reason the price is not a legitimate sale price, or when there is no sale price at all.

V. Tax Rate

A. It is recommended that the rate be uniform. Any system of differentiated rates creates an almost impossible administrative problem since there is no way of getting the retailers to keep records which will show sales in each rate group.

VI. Shifting of the tax

A. There should be included a provision that retailers may not advertise that they are absorbing the tax.

B. There shall be a statement to the effect that the retailers are expected to reimburse themselves for the tax from the consumers whenever feasible, and to quote the tax separately from the selling price of the article whenever it is feasible. The provision should be similar to the provision in the California law. There should be no actual mandatory shifting provisions.

C. The Commissioner should be allowed the authority to issue schedules for collection if found desirable. No provision for this is necessary or desirable in the law.

VII. State-Federal cooperation

The Commissioner should be given express power to enter into agreements with the States individually to provide for as much cooperation and joint use of personnel, equipment, and lists, etc., as may prove possible.

VIII. Administrative provisions

A. Permits

It is recommended that each person (individual, partnership, corporation, etc.,) upon whom a tax is imposed be required to obtain a permit. This requirement serves the purpose of furnishing the administrator the names and addresses of taxpayers and power to revoke the permit is an extremely effective collection procedure. Since permits are not required for the purpose of raising revenue, it is suggested that the permits be issued for an indefinite period, rather than on an annual basis and that a fee of not exceeding $1.00 be charged for a permit. The permit should be non-transferable in order that the administrator will be advised of all changes of ownership and valid only for the transaction of business at the place designated thereon, in order that he will be advised of changes of business locations. A separate permit for each place of business operated by a firm having two or more branches appears advisable as a means of avoiding confusion when the branches file separate returns. The fact that a permit is required for each separate place of business would not, however, preclude the use of consolidated returns covering the several branches of a firm when it desires to report on that basis.

B. Returns

It is recommended that the basis reporting period be a calendar quarter, quarterly reporting having an advantage over monthly reporting in that it is not necessary to require reports as often as monthly from a collection standpoint for a large proportion of the taxpayers and the administrator will have an opportunity to prepare a delinquency list for one reporting period before reports for the next succeeding period are due. The administrator should, however, be given a discretionary power to require returns either more frequently or less frequently than quarterly whenever necessary to facilitate or simplify the collection of the tax. The returns should be accompanied by a remittance of the amount of tax shown thereon to be due.

C. Limitation periods

As a matter of fairness to taxpayers, it is strongly recommended that a limitation period of the same duration be set forth for the granting of refunds as is set forth for the levying of assessments of tax.

D. Security to insure payment of tax

It is recommended that the administrator be authorised to require the deposit of security (generally in the form of a surety bond or cash deposit) to insure the payment of tax. The grant of authority should be worded in such a way as to permit him to require security of particular taxpayers or particular classes of taxpayers whose financial condition may be questioned. The security requirement is advisable not only from the standpoint of enforcing payment of the tax but also from the standpoint of minimizing the number of cases in which a retailer will be able to divert to his own purposes funds collected from his customers as tax reimbursement and thereby in a moral though not in a legal sense defraud his customers and the Government.