Where do you live?
Russia? Germany? United Kingdom? Australia? If yes, then you are very likely to understand the words “sales tax” differently from people whose answer is “United States” or “Canada”.
The reason is that the US (and Canadian) taxation system is very different from that used all over the rest of the world.
Let me show you an example with 3 parties involved.
A mining company produces ore, which is then transformed into a car by a manufacturer. The car is sold to an end user.
What happens in this case, say, in Germany?
The manufacturer buys ore and pays to the mining company both the cost price and VAT. Then he sells the car to the end user and charges the car price and VAT on it. As a result, the manufacturer pays the VAT amount to the state, but before that he deducts the amount of VAT already paid to the mining company.
The state receives payments from both the mining company and the manufacturer.
Of course, the end user is the one who actually pays both parts of this VAT.
And now let’s move our scenario to United States.
The transaction between the mining company and the manufacturer does not involve any tax at all. The full amount of sales tax is taken from the transaction between the manufacturer and the end user.
The state receives the payment only from one part.
And, again, this is the end user to finance all the taxes.
So, what is the point? The American model uses less parties involved in the relationship with the state. It is easier to control to some extent. US IRS (Internal Revenue System) is not interested in the relationships between the manufacturer and the mining company. It only controls the last part of the chain.
But what happens if the manufacturer decided not to use the ore for manufacturing purposes, but use it for some internal consumption? Here comes the second part of the Sales Tax, its brother the Use Tax. In this case the manufacturer should itself evaluate the amount of self-consumed goods, calculate Use Tax and pay it to the state. Again, if the mining company does not self-consume anything, it does not need to report to IRS at all.
You see, up until this point the American Sales Tax system looks much simpler than he VAT-based system. But still American taxation is understood to be the most difficult in the world. Why? Because of the complexities of US tax administration.
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