How State Sales Taxes Work

The Down Side of Sales Taxes

Some sales tax critics believe that online shopping makes it easier for customers to buy goods in other states and avoid extra sales taxes.
Some sales tax critics believe that online shopping makes it easier for customers to buy goods in other states and avoid extra sales taxes.
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Many observers say that Americans accept sales tax more willingly than they do other taxes [source: Duncan]. We pay it in small amounts, we're used to it and there's no paperwork for the consumer.

The main criticism of sales taxes has to do with fairness and social justice. Sales taxes are regressive, meaning that they hit the poor harder than the rich. Poor people have to spend a larger percentage of their income just to get by. Richer people can save more of their income or use it in other ways that don't involve paying sales tax [source: Froomkin].

But that's not the only rap on sales taxes:

  • Too many exemptions With the exception of Hawaii, most states with sales taxes exempt a number of items. Some of these exemptions lessen the tax burden on the poor. Food is often exempt, as are prescription medications. Other exemptions are more politically motivated and draw criticism.
  • Too complicated Exemptions are one reason sales taxes are complicated and sometimes confusing for retailers. Another is the fact that various states have different rates, rules and ways of collecting from retailers. This maze of tax laws can be a nightmare for retailers doing business in more than one state.
  • Double taxation Businesses usually are treated as consumers and charged sales tax on office supplies and other items they use that don't go directly into the products or services they sell. This expense raises the price they charge on their goods or services, on which consumers pay sales tax [source: Duncan].
  • Can't keep up with the times The economy has changed faster than sales taxes have. Services are a much bigger part of the American economy today than they were in the 1930s. States are beginning to tax some services like telephone and cable and satellite TV, but they encounter a lot of resistance.
  • Lack of online taxes The Internet has affected sales taxes in at least two important ways. Online shopping makes it easier for consumers to buy goods in other states and avoid sales taxes on most purchases. And downloading music, movies, books, games and software allows people to buy things they want without paying state sales tax [source: Fox].

Sales taxes aren't the perfect way for states to raise revenue. And if states are going to continue to rely heavily on sales taxes, they'll have to figure out how to deal with changing times. But shoppers should know that state sales taxes won't disappear anytime soon.

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  • Federation of Tax Administrators. "2010 Sales Tax Holidays." (Accessed March 7, 2010)
  • Fox, William F. "History and Economic Impact." Sales Taxation, edited by Jerry Janata, with Donald Bruce and Matthew Murray, Contemporary Economic Policy, October 2002.
  • Froomkin, Dan. "Tax Policy: Ripe for Reform?" The Washington Post, April 28, 1998. Accessed March 4, 2010
  • Hornbeck, Mark. "Granholm Faces Battle Over Proposed Sales Tax on Services." The Detroit News, Detroit, Mich., Feb. 12, 2010. Accessed March 7, 2010
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  • "Vt. Tax holiday draws shoppers." South Burlington, Vt. March 6, 2010. Accessed March 8, 2010