Welcome back, in this video, we're going to talk about sales and use taxes. Now if you live in the United States, you're probably pretty familiar with sales taxes. In fact, it's probably the tax that most individuals encounter on a daily basis. The first modern sales tax in the United States was enacted by in Mississippi in 1930 as an effort to raise revenue during the Great Depression. And other states quickly followed Mississippi's lead. By 1947, the retail sales tax became the greatest single source of tax revenue for the States. Today, there are 45 states that impose sales and use taxes. In addition, there are thousands of local governments, such as county cities and towns that impose their own local sales tax. Although usually these local sales taxes are administered and collected as part of the state sales tax system to help reduce compliance burden on businesses. The five states without a statewide sales tax are New Hampshire, Oregon, Montana, Delaware and Alaska. However, Alaska does allow local municipalities to impose a sales tax. Here we can take a look at the combined state and local average sales tax rates across the United States. This is a map from the nonprofit think tank The Tax Foundation. Now, one thing to note here is that even though this map gives us a pretty good idea of the relative rates imposed across the country, it doesn't tell us much about the tax base. Because taxes are all about the tax base, in other words, what transactions are taxed multiplied by the tax rate. Now you may recall from one of our introductory lessons that every state uses a different mix of taxes to fund their operations. And some states rely more on sales taxes for their tax revenue than other states. But on average, states receive roughly one third of their tax revenues from sales taxes, but that's the overall average. On this next map, again from the Tax Foundation it shows us the extent to which each state relies on the sales tax, for the total tax revenues. Now, if you're watching this video from within the United States, look and see how much your state relies on the sales tax. And based on the sales tax rate that you pay, do you find this result surprising? So now that we have a little bit of background, let's talk about what, exactly is a sales tax. In the United States, the most common sales tax is a retail sales tax. This is a tax is imposed upon a transaction, and it's imposed on a retailer or a vendor's retail sales transactions occurring within a particular state. Now the tax is calculated as a percentage of this transaction price, and it's going to be the state rate, plus any local rate that may apply. We multiply that combined rate by the tax base, and that's going to be our sales tax amount. Now, what differentiates a sales tax from another type of transaction based tax that's more common throughout the world, the value added tax, or VAT, is that the sales tax is generally, or at least ideally only imposed on the products final sale to the ultimate consumer or ultimate end user, for that end, users personal use and consumption. Intermediate transactions are generally excluded or exempted from the sales tax base. So we'll spend some time in some later videos talking about whether and when those intermediate transactions are actually exempt from the sales tax. But let's just get back to the basics, so how does the sales tax work? So example, suppose I was going to a local clothing store Champagne, Illinois, and I was going to buy a 100 dollars pair of shoes. Of course, $100 is the pretax price, and not what I would actually expect to pay once I made it to the checkout counter. Instead, what I will actually pay for that pair of shoes is 109 dollars, and that extra $9 is made up of the Illinois state sales tax rate, the Champagne County sales tax and the Champagne City sales tax. Now of these taxes, the state sales tax is going to be consistent throughout the state of Illinois. However, that county and city tax is going to vary depending on what county or city I am making my purchase in in Illinois. So suppose instead of going to a local clothing store here in Champagne, Illinois, what if I drove a couple miles south to Savoy, Illinois, and purchase that same $100 pair of shoes. Well, in Savoy, just a couple miles away, the price after taxes would be $108, that's a whole dollar cheaper. And you can see the difference here is driven by the differing city sales tax rate. I'm in the same state, I'm in the same county, but because of the lower city sales tax, my after tax price will be $1 cheaper than if I had purchased that exact same item in Champagne. Now consumers in the United States are conditioned to expect to pay more the register than what they actually see on the price tag. So this probably comes as no surprise to anyone who's ever done any shopping. So the sales tax is imposed on a transaction, and it is a charge to the customer or the end user of the retail product. But it's the retail merchant or the vendor that has the legal obligation, assuming that they have substantial nexus with the state, it's that retail vendor that has a legal obligation to collect and remit that tax to the state. That is, if I purchase my pair of shoes from a vendor who is subject to a sales tax collection obligation, my role in the sales tax as a consumer is complete when I make the purchase. No further action is needed on my part. However, the vendor collected the tax and they'll be responsible for remitting it to the state. However, if I make a purchase from a vendor that is not subject to a sales tax collection obligation, well, I'm not completely off the hook, because then something called the use tax may apply. And we'll talk about that in a later video. But states strongly prefer to put the collection obligation on the retailer as opposed to the consumer, because they want the retailer to send the check into the state. And the reason for this is that retailers are thought to be in the best position to collect the tax, since they can do it at the moment of the transaction. And they have the accounting wherewithal to better meet the compliance obligations of the sales tax as opposed to an ordinary consumer. And if a retailer fails to collect and remit the tax, most states have laws in place that will severely punish the business owners, or the business officers or anyone who is known as a responsible person. Making them personally liable for the businesses unremitted sales taxes. So there's a very strong legal incentive for everyone involved in the sales tax collection of the business to make sure those taxes reach the state. And you will recall that after the Supreme Court's decision, Wayfair, states have the ability to subject out of state sellers without physical presence in state to a sales tax withholding obligation. So currently, a state's power to subject businesses to the sales tax collection obligation has never been greater. On the flip side, the technology available for businesses to comply with the various sales tax regimes throughout the country has also never been more readily available and easily accessible. Now, over half the states with the sales tax recognize that the collection and remittance of the sales tax is an administrative burden on retail businesses. So they will allow a small collection allowance for the retailer to help promote compliance. And this is just a small cut of the sales tax collected that the retailer can maintain to reduce the administration costs.
