Consumption Tax Outline
The Nature, Importance and Spread of the VAT-
-The VAT is in essence a tax that is charged at all stages of production, but with the provision of some mechanism enabling firms to offset the tax they have paid on their own purchases of goods and services against the tax they charge on their sales of goods and services.
Broadly two different forms of VAT
(1) Invoice-credit for of VAT- which is tax paid on inputs is offset by a means of a credit against tax due on output
(2) Subtraction method- which the offsetting is achieved implicitly by charging tax on the difference between the values of outputs and inputs.
Some general terms-
Zero rating- refers to a situation in which no tax is applied to the sale, though credit is still given for taxes paid on inputs.
Destination principle- the international norm- requires that the total tax paid on a good be determined by the rate levied in the jurisdiction of its final sale.
Origin of principle-requires that tax be paid at the rate of, and to, the country or countries in which the item is produced rather than consumed.
Exemption is quite different to zero-rating in that, while tax is again not charged on outputs, tax paid on inputs cannot be reclaimed.
Countries with VAT-General Trends
A large number of countries throughout the world that do not have the VAT are smaller countries the
Also a strong federalist system that places a lot of the taxing control in the states like the U.S. and India do not have a VAT.
-general observation is that the VAT rate is around 16% yet there is significant variance but very few states have a VAT rate over 30%
-only five countries have removed the VAT so far and two have implemented it again.
Levies as Sales Taxes- roughly 40% of the American retail sales tax are revenue attributable to business purchases.
Effect of sales tax on the consumer or business depends on demand elasticity of the good therefore the more elastic the good the more likely the tax will borne by the business if it is more inelastic the more likely it will be borne by the consumer. Thus if demand is inelastic, the more likely the tax will become regressive. There is a debate as to whether the sales tax is regressive, it is regressive without exemptions but food is exempt, which helps ease the burden of the sales tax on those most likely to feel its regressive affects.
Two flaws in the Sales Tax
(1)The retail sales tax does not live up to the normative ideal of a tax on a household consumption, but in fact includes substantial business purchases within the tax base.
(2) The second flaw is that the sales tax is confined largely to sales of tangible personal property and does not extend generally to sales of purchases or services or intangible property.
Rylander v San Antonio SMSA Limited Partnership- “The existence of a single invoice or a single contract will not affect taxability. When readily separable transactions have been provided, each transaction must be analyzed independently to determine if a sales tax shall be imposed.
– When the sale of the tangible property and the service can readily be divided than the vendor should show in the statement the two different services.
Sale of property can be taxed under the sales tax also there are attempts to tax the lease of property.
-the determination is normally made under a standard in which the leaser has to have control or possession
Retail sales tax- a retail sales tax in principle reaches only sales to the ultimate consumer. In accordance with the principle, state sales taxes exclude or exempt many intermediate transactions in the economic process from sales taxation. Every state retail sales tax for example contains a sale for resale exclusion or exemption.
-yet it falls short of this goal , and ends up taking business purchases, which are then used for the purpose of the development of other goods, which are then sold to end consumers.
Fairlawn Shopper- Resale, encompasses a free newspaper, because of the economic realities of the newspaper, which are sufficed by the purchases of 3rd party advertisers (basically the point of the paper is still to make money)
Mendoza Fur Dyeing v Taylor- even if a good is incorporate into another, in this case a dyeing product, it can be exempt from the retail sales tax, as a sale for resale.
.Inherently there are some issues regarding consumption of the good while conducting services and incorporating the good for resale of a product.
For example the purchase o
to a certain extent this conflicts with Quill.
(2) Sale for Resale issues.
a. Very hard to figure out, runs the risk of a cascading tax.
b. Courts are more likely to make the easier determination and say that the service was consumed.
(3) Situsing issues
a. Services go through many different states till they get to the point of consumption.
i. How do you determine which is the taxing jursidiction?
1. Most states exempt sales that are for consumption out of state (consumption tax parallel)
2. Basic default rule place of consumption is where the tax should be applied.
3. Other method is taxing on the basis of what is used in the state as a ratio.
Bundled Services- default will tax everything even if certain stuff is exempt, but if it is separated on the billing then it is okay.
SSTP-streamlined sales tax project- which is attempting to create uniformity through jurisdictions, as to the rules governing sales taxes.
IV. Session IV
a. 19-23 (Glossary)
i. Accounts-based VAT
1. taxpayer computes tax liability from date for each tax period taken from books of account
2. typically addition or sales-subtraction VAT
3. alternative is the credit-subtraction VAT (relies on invoices)
4. Japanese Consumption Tax has features of transactions and accounts based VAT
ii. Addition-method VAT
1. taxpayer calculates value added by summing the value of the factors of production used in the production of taxable goods and services
a. method does not include VAT-paid inputs
b. assumes that interest and rent expenses not subject to VAT
2. alternative is the subtraction-method VAT
iii. Consumption VAT
1. tax base is the value of goods and services sold or transferred for personal consumption
2. input credit claimed for