Taxes, taxes, and more taxes. While a tax preparer may have a good grasp on all of this, that’s not necessarily the case for the rest of us. We have federal tax, state tax, sales tax, franchise tax, sin tax, property tax, estate tax, gift tax, and on and on…how can we keep up with them all? Usually when we think of taxes, we think of direct taxes, such as income tax or property tax, for example. In these cases, the taxation relationship is pretty clear. The government is taking taxes directly from us, as it pertains to our income or our property. This form of taxation is relatively well-understood by most of us, tax preparer, or not. So, what about indirect business taxes?
Indirect business tax (IBT), on the other hand, is not as readily noticed as the aforementioned direct taxes. IBT is often referred synonymously with “sales tax.” If you think about how sales tax works, you are getting taxed, however you, yourself, are not sending your tax payment to the government, as it occurs indirectly, through the entity you bought goods or services from. You are paying the tax, yet the responsibility of payment of that tax money to the government falls on the goods or service provider who collected it from you, hence it is called an “indirect” business tax.
Other examples of indirect taxes include value add tax (VAT), defined by Merriam Webster’s online dictionary (https://www.merriam-webster.com) as “an incremental excise that is levied on the value added at each stage of the processing of a raw material or the production and distribution of a commodity and that typically has the impact of a sales tax on the ultimate consumer.” The VAT also comes into play as somewhat of an equalizer for taxation on goods purchased across countries, in essence a goods and service tax (GST). In the U.S., GST is observable in such cases as retail stores who indirectly charge the consumer for these taxes, but are ultimately responsible for paying and filing for them. For certain businesses, another indirect tax may be relevant, such as an excise duty, which applies to those who produce or manufacture (including outsourcing the manufacturing of) certain goods. In such cases, the company who manufactures the goods adds the tax through cost of goods sold (COGS), which in effect, results in the buyer paying the tax, indirectly.
So, why should we care? Well, we should care because whether we realize it or not, we are affected by indirect taxes, possibly just as much, if not more than direct taxes. In fact, some experts argue that indirect business tax is a regressive tax strategy, in that people of lower income are contributing a higher share of their earnings, as opposed to wealthier people who proportionately are contributing less of their income. Since the United States manages sales tax at the state level, the percentage or rate of this effect varies across states. For example, the California statewide tax rate is currently 7.25%, but some local jurisdictions can add .10 to 1.00% on top of that, referred to as “district taxes,” so it can effectively be 8.25%. Maine, on the other hand, is currently at 5.5%, as another example. If you consider your spending, perhaps through last year’s documents completed by your tax preparer, or possibly on your bank’s website, as many offer yearly spending reports, you may very well be surprised to see the actual impact of this form of tax spending.
So, while often overlooked by those of us who are not currently a tax preparer, tax policy maker, or other professional in this field, the effect of indirect taxes can be costly. For this reason, tax policy and administration related to indirect taxes can be somewhat controversial, a source of consistent debate. In particular, when taking into account our global economy, the spread of policy and use of VAT is increasing, not to mention expansion of customs and excise duties. The world is shrinking. Global travelers and businesses burdened with the expense of sending employees around the globe to fulfill business initiatives are also incurring broader tax expenses. With regards to travel tax expenditures, ask your tax preparer about the possibility of claiming VAT refunds, as a way to recoup some of these expenses.
