What is Sales Tax Law?

Sales tax law is the statutory authority granted to governments to levy an additional fee on the retail consumption of certain goods and services. A governing statute establishes the government’s right to tax, defines which items are taxable and non-taxable, and sets the applicable tax rate. This type of law is particular to each jurisdiction, which decides if and how a sales tax law will take effect. Some countries have abandoned the traditional type of sales tax that is only assessed on certain retail items in favor of a flat fee on all sales called a value-added tax (VAT).

Taxes are always particular to a specific country or jurisdiction. Sales tax, in particular, can be implemented in a variety of ways, depending upon the jurisdiction’s priorities for raising revenue from its citizens. This tax was traditionally a tax imposed on the sale of items at the retail level, and not all consumer items were taxed. Certain categories of items, such as food, would be exempt from taxation. Laws would change periodically, adding or subtracting items from the taxable list.

A categorical sales tax law isn’t the only model for taxation. Some countries started out with a traditional sales tax but moved in the direction of placing a flat tax on all sales, thinking it easier and more manageable. Under the traditional system, only the sale at the retail level would be taxed, while anyone making a wholesale purchase for resale would be exempt from sales tax. A flat tax system makes no such distinction. All sales are taxed, but only on the differential in value between one sale and another of the same item.

The U.S. is one of the only jurisdictions that still imposes the categorical sales tax. There is no federal sales tax law in the U.S. beyond a federal proposal to add a sales tax on tanning salon services to support universal health care. Instead, each state and some cities and municipalities impose their own sales tax to generate local revenue. The sales tax rate can vary by state from one percent to over ten percent. Sales tax is collected by the seller, but only on those items that are listed as taxable, and remitted to tax authorities on a periodic basis.

Many other countries around the world have switched to using a VAT, including the European Union, Canada, Mexico, and Australia. A VAT removes the inconsistency of different taxes in different areas of the country. It also obviates the need to categorize consumer items onto a taxable list and non-taxable list. Most importantly, it removes the need to monitor exempt buyers, such as those buying at wholesale. All sales are subject to the VAT. The amount paid is a tax on the difference between the original cost of the item and the incremental increase in price at each sale.