In economic terms, sales tax is an excise tax because it is directed on the end user purchasing a given product. Sales tax is an indirect tax, that is closer to consumption and transportation taxes.
According to the legal framework guiding the implementation of sales tax, it is intrinsically a transfer tax, because it is triggered by participation in the exchange market. And is also a net tax because the net revenue is only realized when calculating the tax payable. For this reason, many entrepreneurs consider it a transitory item, they can charge the value added tax (VAT) payable to the procurement processes.
A traditional or retail sales tax involves charges pertaining to the sale of goods to final end user or consumer. As such, a resale certificate is usually necessary for anyone who buys an item with the intentions of reselling it, otherwise the tax applies.
Most items reach the end user via a variety of phases. A product is usually made from different materials, sold to a wholesaler, who resells to a retailer until the goods are finally delivered to the consumer. Sales tax can in this chain apply to each stage; multiphase means it applies to some but not all stages and single phase applies to only one sales process.
The sales tax is referred to in its current form as net sales tax with deductions. This follows from the fact that taxation is provided at each stage of value adding process.
Like any other tax form, sales tax brings advantages and disadvantages. For example, administrative efficiency – value-added tax (VAT) requires no administration and can be limited to oversight. Self-control by the taxpayer – value-added tax paid by the end user, allows an effective control of intrinsic direct taxation.
Income tax rate independent – the rate is only based on the goods consumed. Impact on import and export – value-added tax is effective only within a given national territory, it is therefore not applicable for export products.
Consumption tax compared to the factor of taxation – taxes the consumer product, that is the end product of the production process. The tax factor on the other hand increases the cost of production factors, ie, the product development.
The two methods of taxation have different influence on the productive forces of an economy. Since the factor precludes taxation of product development and thus inhibits production.
Abuse vulnerability – the current sales tax system is very open to abuse, for example, the treasury loses billions annually to the so-called carousels. Shift from income taxes to the transaction taxes – in some countries there is a strong tendency towards the use of direct taxes than indirect taxes.