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What is a Luxury Tax?

Diane Goettel
Updated May 17, 2024
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Some luxury goods, or items that are not considered essential, are accompanied by a luxury tax. This tax is often modeled after sales tax, a tax that is applied to the sales or rental of specific properties or services, or value added tax (VAT), a tax that is applied to exchanges in which the value of an item or service has increased.

Luxury tax is often applied to very expensive cars and jewelry. In cases of expensive real estate transactions for private homes and properties, the tax might also be applied. Because it only applies to items that can be purchased by the wealthy, the tax only applies to the wealthy. There is rarely a public outcry regarding luxury taxes because they only apply to a narrow margin of individuals.

If someone plans on purchasing a Bentley or a precious stone the size of a baby’s fist, then he should prepare himself not only for the cost of the purchase, but also for the cost of the tax that is likely to be required.

Sometimes, luxury taxes may be rescinded if an item drops in value or becomes available in some other way to the general public. If diamonds suddenly dropped to the shocking price of $10 US Dollars per carat, or if Bentley automobiles started selling for the same price as economy sedans, then the luxury tax on such items might be waived. Unfortunately for most people, both of these instances are highly unlikely.

Luxury tax can be a very important part of the sports world. It is sometimes applied to the total payroll of a sports team if the total exceeds a limit imposed by the sports league. The purpose of this is to prevent major teams with large incomes from signing all of the top players in a league. If a team had the financial leverage to buy every top player, then the competition within the sport would decline and the interest of fans would likely wane. In this interesting instance, the tax creates a more level playing field. The money that is derived from a luxury tax applied to professional sports contracts is divided among teams in smaller markets. These teams generally use the funds to sign important players.

While a luxury tax has many different uses and is applied to many different goods and services, it is almost always associated with transactions of large sums.

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Diane Goettel
By Diane Goettel
"Diane Goettel has a BA from Sarah Lawrence College and an MA in English from Brooklyn College. Diane lives in Mount Vernon, New York with her husband, Noah. They are the proud parents of a Doberman Pinscher named Spoon. Specialties: book editing, book marketing, book publishing, freelance writing, magazine publishing, magazine writing, copywriting,"
Discussion Comments
By betterment — On Dec 03, 2012

@indemnifyme - I think it's a good thing too. Plus, how much do these major league sports players really need to be making? I hear about sports figures getting paid extremely high salaries, and that's with the luxury tax. I can't imagine how much some players would make if the luxury tax was removed.

By indemnifyme — On Dec 02, 2012

I had no idea there was a baseball luxury tax or football luxury tax on the payroll of a sports team. This is kind of a cool idea though, and I agree with the article that it probably keeps the game more interesting.

After all, if one team had enough money to get all the really good players, none of the other teams would stand a chance. The luxury tax helps make sure that one team can't pay their players a huge some of money, so all the teams have a chance to get good players.

By JaneAir — On Dec 02, 2012

@Pharoah - I disagree. Why should successful people be punished for being successful with extra taxes? The sales tax rate should be the same on all items, regardless of the cost or who is purchasing the item.

By Pharoah — On Dec 01, 2012

@anon70173 - I've never heard of a luxury tax applied to bonus checks. I think luxury taxes are only applied to items, or to sports teams. However, I'm not sure where you live so I can't say for sure. You should probably check with the account department at your work for the answer to your question.

I think luxury taxes are a pretty good idea. I feel like anyone who is buying a Bentley or a gigantic diamond probably has enough money that the luxury tax is nothing to them. But it's an extra source of revenue for the government that doesn't have to come for the poor or the middle class.

By anon246349 — On Feb 09, 2012

The article is rather clear and informative. The only problem is that it provides no information regarding differences in luxury taxes across the world.

The article is clearly about the US, but, you know, English has become kind of an international language, so posting something informative online without pointing out which particular country you're talking about may sometimes be confusing.

By anon178853 — On May 22, 2011

is art subject to a luxury tax; like artwork i make and want to sell online?

By anon70173 — On Mar 12, 2010

Is there a luxury tax on bonus checks from work and why we are not rich?

By missiegirl — On May 19, 2008

Is there a luxury tax on items won in a contest, raffle, or any other similar fashion?

Diane Goettel
Diane Goettel
"Diane Goettel has a BA from Sarah Lawrence College and an MA in English from Brooklyn College. Diane lives in Mount...
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