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Indirect Business Tax: A Definition & Examples For Small Businesses

Indirect Business Tax: A Definition & Examples For Small Businesses

Indirect business taxes, sometimes referred to as hidden taxes, are taxes that can be passed on to customers by being incorporated into a higher price. They are not added to the price of an item, like sales tax. For example, the gasoline tax is included in the price of gasoline at the gas pump. The producer of the gas pays the tax to the state. Also, import duties are another type of indirect tax for businesses.


What are indirect business taxes?

Direct taxes are taxes by the taxpayer directly to the government, such as income tax and property tax. Indirect business taxes, on the other hand, are taxes that are often included in the price of a good or service. The buyer may not know that tax is included in the price; therefore, indirect taxes are sometimes referred to as "hidden taxes."

Since indirect business taxes are included in a good or service price, the buyer pays more than he would normally pay. The price must be increased to take into account the indirect tax.

Examples of indirect taxes include the gasoline tax, which is included in the price of gasoline at the gas pump or in the form of import duties or royalties on equipment, raw materials, or goods destined for resale.


Who pays indirect taxes?

Small businesses pay indirect taxes if they are involved in activities for which indirect taxes are routinely collected. Here is a list of indirect tax types, probably at least one that applies to your small business:

  • Charges for cable/satellite TV, mobile, and phone services (in certain states only)

  • Hotel rates

  • Import duties or taxes

  • Special charges for "unnecessary" items such as tobacco, alcohol, or gambling

  • Stamp duty (on notary stamps)

  • Taxes on gasoline and other fuels

  • VAT in Europe and other countries outside the United States.


What are some examples of indirect taxes?

Gasoline Tax

Gasoline charges are included in the price you pay at the pump. Each state sets the share of the gasoline tax. The gas producer integrates the tax into the consumer price, increasing it according to the value of the tax in a given state. The producer of the product is the one who pays the tax to the government.

For example, the tax on gasoline in Texas is 20 cents per gallon. So if gasoline costs $2.80 per gallon at the pump, the price before taxes is actually $2.60.


Airport Fees

Airport taxes are an example of indirect taxation. Fuel taxes are included in this tariff. So whether you are a trucking company or travel a lot for work, you will end up paying this collateral tax.


Communication Service Tax

Each state decides taxes on services. Some service charges may be included in the prices of mobile, telephone, or television services, and some charges may be added to the customer's bill as an additional charge.


Import duties or tariffs

Goods imported into the United States include import duties or taxes. The consumer price of these goods is increased to reflect these tariffs. Small businesses that import raw materials, items to sell, or equipment will have to pay these hidden taxes.


What is the dissimilarity between direct and indirect taxes?

The definition of a direct tax is a tax paid in addition to the price of a good or service. Indirect taxes are included in a good or service price, so they are also called "hidden taxes."

Income tax and corporation tax are direct taxes because they are paid after the business owner or individual reports income, profit, or loss. Sales tax is also a direct tax, which is added to the price of a good or service at the time of purchase.

In contrast, indirect taxes, such as the gasoline tax, are added to the price. Consumers may not even know they are paying indirect taxes.


What is an example of direct tax?

Here are some examples of direct taxes:

  • Capital gains tax: paid by investors when they sell an investment at a profit.

  • Commercial income tax

  • Personal taxes

  • Sales tax: paid in addition to the price of goods and services by the consumer at the time of purchase.

  • Wealth tax: this is the tax on the value of what the deceased owned at the time of his death, also called "wealth tax."


Why would a government choose to use an indirect tax at the expense of a direct tax?

Governments often impose indirect taxes to change consumer behavior. Certain indirect taxes, called "sin taxes," are designed to discourage certain types of activity.

 For example, tobacco products are addictive, so taxing them does not affect the number of cigarettes, tobacco, and cigars people buy. The federal government, states, and some localities charge for tobacco, so the tax on cigarette packages can be as high as 40% of the retail price.


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