chapter 13: sales and excise taxes

South Dakota v. Wayfair

Supreme Court case allowing states to require tax collection from remote sellers based on economic nexus

Economic nexus

Requirement for tax collection based on sales thresholds rather than physical presence

General sales tax

Tax on retail sales of goods and some services

Use tax

Tax on out-of-state purchases when sales tax is not collected

Excise tax

Tax on specific goods or services such as tobacco, fuel, or alcohol

Unit tax

Tax levied per unit of a good

Ad valorem tax

Tax levied as a percentage of price

Sales tax reliance

Sales and excise taxes are major revenue sources for state and local governments

Tax base (sales tax)

Portion of consumption subject to taxation

Exemptions

Goods and services excluded from taxation, reducing the tax base

Tax inefficiency

Distortions caused when consumers shift toward untaxed goods

Retail sales tax

Tax applied only at the final stage of sale

Tax pyramiding

Multiple taxation at different production stages, increasing effective tax rate

Gross receipts tax

Multistage tax on total business revenue causing pyramiding

Resale exemption

Exemption for goods purchased for resale or production inputs

Origin principle

Tax based on location of sale

Destination principle

Tax based on location of consumption

Use tax compliance problem

Difficulty enforcing taxes on out-of-state purchases

Service taxation issue

Services are often untaxed despite being a large share of consumption

Excise tax purpose

Used for revenue, equity, and behavior modification

Income effect (tax)

Reduction in purchasing power due to taxation

Price effect (tax)

Change in relative prices leading to substitution

Border effect

Consumers purchase goods in lower-tax jurisdictions

Ramsey Rule

Optimal taxation minimizes efficiency loss by equalizing proportional reductions in demand

Deadweight loss (sales tax)

Efficiency loss from distorted consumption decisions

Regressive tax

Lower-income households pay a larger share of income

Sales tax regressivity

Sales taxes are regressive because low-income households spend more of income

Tax credits

Payments or reductions used to offset tax burden and improve equity

Marketplace facilitator law

Requires platforms to collect and remit sales tax

E-commerce tax issue

Difficulty collecting taxes on online purchases

Pre-Wayfair revenue loss

Estimated $20–25 billion in uncollected sales taxes annually

Cigarette tax evasion

High taxes lead to smuggling and reduced tax revenue

Broad tax base

Taxing more goods and services to improve efficiency

Optimal commodity taxation

Setting tax rates to minimize efficiency loss given constraints