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What Are Indirect Business Taxes?

What Are Indirect Business Taxes?

You are responsible for personal and business taxes as a small business owner. There are two types of taxes: direct and indirect. What differentiates these two groups? Indirect and direct taxes mainly differ in how they are paid and who pays them.

In the end, all taxes go to the government; they are a way to generate revenue. However, while direct taxes are paid by a person or entity directly to the government, indirect taxes are paid to the government indirectly through a third party, usually a business entity like yours.

This guide provides a more detailed explanation of indirect business taxes, their importance, and examples of common categories of indirect business taxes you may encounter when running your business.


What are indirect corporate taxes?

Indirect business tax is levied on consumer goods. Eventually, the burden of paying indirect taxes falls on the consumer, not the company selling the product. However, the company still has to collect the tax and remit it to the government. An example is a value-added tax (VAT). It is a type of sales tax that can be levied on goods as they are produced through the supply chain, increasing the product's final cost to the consumer.

To understand indirect taxes on businesses, they must be differentiated from direct taxes. All taxes go to the government (federal or state); however, with direct taxes, the taxpayer (A) pays the tax directly to the state (B). An example of a direct tax is the income tax. Direct taxes are variable and tailored to a person's ability to pay. For instance, the more you earn, the more taxes you pay. Property tax is another example; the more valuable your property is, the more property taxes you pay.

With indirect taxes, the taxpayer pays the tax to a third party (C), who then takes that tax and pays it to the government. In the U.S. tax system, taxes are collected by the IRS at the federal and state levels. Indirect business taxes include excise duties, value-added tax, gasoline tax, final goods and services tax (GST), and customs duties. Indirect taxes are placed at a standard rate and do not take income into account when calculating the tax rate.

Many companies add indirect taxes to the price of the raw materials, goods, or services they sell. For this reason, indirect taxes are sometimes called "hidden taxes." The person purchasing the goods or services may not realize that these indirect costs are included in the price of the goods or services. For instance, you won't always know what value-added taxes are applied to a product as it passes through the supply chain before reaching you.

Although all taxes generate government revenue, indirect taxes do not contribute to a country's gross domestic product (GDP). A country's GDP is a measure of its economic power. It refers to the market value of domestic consumption of goods and services, net exports, investment, and government expenditure. To find a country's national income, subtract depreciation and indirect business taxes from total GDP. Therefore, national income is the total income derived from wages, profits, rents, and interest.


What are examples of indirect taxes on profits?

So far, we have talked about VAT because it is an example of a fairly universal and easy-to-understand indirect tax. Still, this is only one type of indirect tax. Here are some additional examples.


Excise Tax

You pay special fees to use or purchase a product. Excise duties are a type of excise duty. They are sometimes referred to as "sin taxes" because they are typically levied on products traditionally considered "sinful" (e.g., alcohol, tobacco, and gambling goods). Excise duties also apply to gasoline. Excise duties are transferred to the consumer who pays for the product, so the taxpayer is the end-user, not the business. The retailer "collects" the levy by increasing the cost of the goods in question, which increases in price.


Import tariffs or duties 

Import duties, also known as customs duties, are imposed on products when they enter the country. Again, ultimately it is the consumer who pays the import tax. In general, the price of the goods is increased to pay the corresponding tariffs. Countries impose reciprocal tariffs on products and generally manage which products are taxed and how much is taxed through free trade agreements. The taxpayer may notice an increase in the cost of goods when governments change agreements that affect these indirect taxes on trade.


Communication services taxes

Communications service charges apply to services such as satellite and cable TV and telephone (cellular and landline). Different states charge fees for communication services differently (some subscriptions charge customers directly).

Technological changes also increase communication costs. For example, some states are beginning to charge for digital content, such as audio, games, software, video, and content delivery mechanisms, such as digital downloads and on-demand or live content.


Stamp duty

This fee is for a notarized rubber stamp, not a postage stamp. Stamp duty is levied on documents used for legal purposes, such as the transfer of goods or ownership. Many states include stamp duty in the cost of the document, making it an indirect tax. Stamp duty can be applied to military commissions, marriage certificates, mortgage deeds, and documents relating to the transfer or sale of the property.


Who pays indirect taxes?

Many types of indirect taxes are included in the cost of goods or services by the businesses that provide them. For instance, mobile service providers may include the cost of call charges in a person's phone bill. The company collects taxes from consumers and then forwards the taxes paid to the government. Therefore, although the company pays the government the money it receives from indirect corporate taxes, this money does not come out of the company's pocket. The consumer, the end-user of the product or service, is the taxpayer.


Bottom Line

As a small business owner, keeping good track of the various business taxes you're responsible for can be a headache. However, it is important to know these details. This ensures legal compliance with applicable state and federal laws and also helps maintain accurate accounting and appropriate tax filing.


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Dennis Jao
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