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The more narrow the base the higher the rate must be to raise an equivalent amount
of revenue. States often have similar consumption items included in their tax base,
but they are far from uniform. Tax rates can also vary considerably, depending on
the state's reliance on other revenue sources. The SSUTA is intended to create a
more uniform sales tax system among participating states.
The SSUTA would establish a system where states would use common
definitions for goods and services. Once a uniform definition is established, states
would then indicate whether the good or service is taxable. In addition, states would
also identify which entities would be exempt from paying sales taxes (e.g., non-profit
or religious organizations).
Tax Base. The sales tax, which is often considered a consumption tax, is
perhaps better identified as a transaction tax on tangible personal property;
expenditures on Internet access, legal, and medical services are often excluded from
the state sales tax base.'5 In many states, groceries are also exempt from the sales tax
or taxed at a lower rate (see Table 1). A true consumption tax would include all
income that is not saved, including personal expenditures on services.16
Business-to-business transactions are often exempt from the retail sales tax,
particularly in cases where the purchaser is using the good as an input to production.
These transactions are exempt because including the transactions could lead to the
"pyramiding" of the sales tax. For example, if a coffee shop were to pay a retail sales
tax on the purchase of coffee, and then impose a retail sales tax on coffee brewed for
the final consumer, the total sales tax paid for the cup of coffee would likely exceed
the statutory rate. Products that a business purchases for resale are typically not
assessed a retail sales tax for a similar reason. If a coffee shop buys beans only for
resale, levying a sales tax on the wholesale purchase of the beans and then on the
retail sale would more than double the statutory rate. Tax treatment of business
purchases is not uniform across states. According to recent estimates, approximately
18% of business purchases are taxable, more or less, depending on the state.'7
Many individuals and organizations are also exempt from state sales taxes.
Entities wishing to claim the sales tax exemption are often issued a certificate
indicating their tax-free status and are required to present this certification at the
point of transaction. Non-profit organizations, such as those whose mission is
religious, charitable, educational, or promoting public health, often hold sales tax-exempt status.
Tax Rate. The second component of a sales tax is the tax rate applied to the
base described in the previous section. In 39 states, local governments piggy-back
's For example, only two states tax medical services, Hawaii and New Mexico.
16 A common identity in the economics of income accounting is the following: C=Y-S. Or,
consumption (C) equals income (Y) less saving (S). Thus, income less savings is total
consumption.
'7 Cline, Robert, John Mikesell, Tom Neubig, and Andrew Philips, "Sales Taxation of
Business Inputs," Council on State Taxation Special Report, January 25, 2005.
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Maguire, Steven. State and Local Sales and Use Taxes and Internet Commerce, report, March 9, 2006; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metacrs9320/m1/7/: accessed July 17, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.