I. Sales Tax and Use Tax
i. The Great Depression led to widespread adoption of the sales tax at the state level
1. They were generally considered emergency or temporary measures.
2. During the depression, the money was in tangible personal property and not services, because people could not afford services à so, no need to tax the services… no money there.
ii. By 1969, the sales tax had spread to 45 states, and no state has adopted one since.
i. Sales tax is intended to be borne by individuals who acquire the goods or services for personal consumption à personal use items
ii. Sales tax should not be imposed upon the acquisition of goods or services for use in a trade or business, business inputs, or with regard to investment activities.
a. But business meals, cars, etc. will still be subject to the sales tax
iii. The tax should only apply to the LAST transaction in the chain of production and distribution.
a. i.e., the sale of the final good to the person who plans to consume it.
c. Policy Considerations
i. Sales tax is traditionally viewed as regressive
1. Regressive view à relate sales tax to income (sales tax/income)
a. As income continues to go up, this ratio will drop
2. But if you use “consumption” as the denominator instead of “income,” the graph becomes more of a hill: progressive à flat à regressive
ii. Ability-to-pay à Income Tax
iii. Standard of Living à Sales Tax
iv. Horizontal Equity:
1. Taxpayers in the same situation should be taxed identically
2. Do we measure taxpayers in the same situation based on “consumption” or “income”?
3. Horizontal equity is hard to implement
v. Vertical Equity:
1. The measure of how a tax treats people who are not in the same situation
2. Regressive, Progressive, or Proportional (flat-tax)
vi. The more price elastic the demand for a particular item, the more demand will fall when tax is added to the price
vii. Neutrality à a tax that does not change the economic behavior of individuals and businesses is neutral
viii. Legal Incidence à the incidence that I determine from looking at the statute and determining who the taxpayer is
ix. Economic Incidence à who actually bears the economic burden of the tax
1. Beyond the legislature’s control, it is the product of supply/demand curves
d. Use Taxes
i. Typically levied upon the use, storage, or consumption of tangible personal property within the state if such property had not already been subject to the state’s sales tax
ii. A credit is typically allowed for any sales/use tax paid to other states for the good
1. If the credit exceeds the use tax, no additional tax is due
2. If the credit is less than the use tax, the state of use collects the difference
iii. Difficult to administer and enforce à basically up to the taxpayer to report
iv. Purpose of Use Tax (from Miller Brothers)
1. Protect in-state revenues
2. Protect local merchants from out-of-state competitors
v. Helps to maintain tax parity between in-state and out-of-state purchases
vi. If out-of-state seller has nexus with the purchaser’s state, the seller may be required to collect the use tax
vii. Personal Goods Exemption:
1. Many states have a statute that says if you own something for 6 months before you bring it into a state you don’t have to pay
viii. Capital Equipment:
1. When companies bring goods into a state to use for a project they are subject to the use tax on the equipment. They do receive credits for what they paid elsewhere, so it tends to work out.
e. Sales/Use Tax Exemptions
i. Sales tax typically ends up getting buried below the surface (consumers pay either way) à i.e. Dad pays sales tax when he buys caskets but can’t charge the consumer sales tax so he increases the price of the casket
ii. Food Exemption:
1. The exemption may not end up in the hands of the consumer but in the hands of the merchant (i.e. merchant passes cost of sales tax along to the consumer by reflecting the cost of the tax in the price of food)
iii. Business Inputs:
1. Should not be taxable under sales tax but we end up taxing a lot of business inputs
2. Sales tax can favor the larger business that do their work in-house
a. Small businesses may have to pay tax on their business inputs that they have to outsource
i. Results in hidden sales tax
3. Relative prices of comparable goods will change according to their percentage of taxable components
iv. Sale for Resale Exemption (Bullock, Milwaukee Brewers)
1. Purchase for resale à typically think of the good not changing its form or use
a. Must have a second “sale”
b. i.e. Inventory
v. Services Exemption:
1. Increases the regressivity of sales taxes
a. The wealthy are the ones who t
s bad but it is not illegal
3. American Stores Packing Co. v. Peters (Nebraska 1979) [Ingredient and Component Exemption]
i. Manufacturing company uses “casings” in the hot dog making process. The casing helps the hot dog keep its shape and improve its appearance by keeping moisture in the product. This helps prolong the shelf life of the hot dogs. Nebraska wants American Stores to pay the state use tax on their purchase of the casings. American Stores argues that the purchase qualifies for the ingredient and component exemption.
i. Is the casing used so that it will enter into or become an ingredient or component part and thus not subject to the use tax?
i. No, American Stores must pay the use tax
i. Because the casings are discarded and not part of the final product, it is not an ingredient or component
1. The function of the casings is to help keep spices inside the hot dogs but the court says this is not enough for the exemption
ii. The Court was in wrong saying that the casings would go untaxed if the use tax did not apply
1. The cost of the casings is reflected in the final retail price and the consumer will bear the burden (pay sales tax on the hot dogs à unless there is a food exemption)
i. Pomp thinks if the casings injected spices or something like that, this case may have been decided the other way
4. Connecticut Water Company v. Barbato (CT 1988) [Manufacturing-Related Exemption]
i. CT Water sells drinking water. It takes raw, untreated water and puts it through a purification process. CT Water uses large tanks in the purification process and wishes to not pay sales/use tax on the tanks. An exemption exists for the “sales of and the storage, use or other consumption of machinery used directly in a manufacturing process.”
i. Does the transformation of raw water into portable water constitute “manufacturing”?