|E. DISTRIBUTION OF SALES TAX BURDEN
All general sales taxes apply the principle of ability-to-pay in reverse; they are regressive instead of progressive. General sales taxes are more burdensome to low-income consumers than to those with higher incomes.
If any one of the three forms of sales tax yielding $1 billion had been in effect in 1935-1936, it is estimated that the average tax burden of families at selected income levels would have been approximately as follows:
ESTIMATED AVERAGE AVERAGE SALES TAX BURDEN /1/ MONEY INCOME AS A PERCENTAGE PER IN DOLLARS OF MONEY INCOME INCOME LEVELS FAMILY PER FAMILY PER FAMILY Under $500 $ 237 $ 9 3.6% 1,000 - 1,250 983 22 2.3 2,000 - 2,500 2,050 41 2.0 5,000 - 10,000 6,537 93 1.4 20,000 and over 40,573 296 .7 /1/ Assuming no exemptions other than "articles for further manufacture." Only tax burden is distributed; the effects of pyramiding were not estimated. Source: Derived from information contained in Consumer Expenditures in the United States.
The distribution of sales tax burden among single individuals follows the same general pattern. However, the average amounts of tax per individual and the percentage relationships to average incomes are different.
F. ADMINISTRATIVE PROBLEMS
The administrative problems fall into two general categories: Firstly, there is the problem involving the mechanics of rapidly developing additional administrative personnel. The expense of developing such personnel suggests that the inauguration of a general sales tax is not desirable unless it is adopted as a permanent tax. Secondly, there is the major problem involving the determination of regulations designed to tax all articles uniformly.
1. PROBLEM OF ADMINISTRATIVE PERSONNEL
A Federal sales tax, regardless of type, will require the development of a large administrative staff to handle the large number of monthly returns and to audit the books and records of registrants and taxpayers with respect to tax-free and taxable sales. However, the problem of administration is greatly magnified under a retail sales tax. It must be collected in smaller amounts and from a larger number of taxpayers than under the other two sales-tax types.
2. DEFINITIONS AND UNIFORMITY OF TAX BASE
Administrative problems resulting from attempts to achieve a uniform tax base may be expected to arise more frequently in connection with the manufacturers' sales tax than with the wholesalers' sales tax. Under the retail sales tax, many of the same problems, as well as additional problems, are encountered, and in all cases the administrative difficulties are greatly magnified because of the number of taxpayers involved.
Under the manufacturers' sales tax many border-line cases arise over the question of what constitutes "manufacturing." In industries encompassing manufacturers that produce similar articles in varying stages of completion it is difficult to administer a manufacturers' sales tax to include uniformly the value of packages and containers and selling and advertising expenses. However, the uniform exclusion of such charges and expenses from the tax base also introduces difficult administrative problems. That is the tax base frequently would have to be determined by deducting a taxpayer's allocated costs and expenses of packaging and selling the finished articles, or by determining the cost of producing the unfinished articles and adding thereto an estimated fair mark-up for profits. Such determinations can be expected to raise many points of dispute between taxpayers and the Treasury over such matters as the proper allocation of costs and expenses between "production" and "distribution" functions. If, in addition, the costs and expenses of distribution vary greatly among taxpayers producing the same articles, it might be exceedingly difficult to establish general regulations.
The experience of the States reveals some of the problems involved in the determination of a uniform tax base under the retail sales tax. Generally, State retail sales taxes apply only to tangible personal property. Thus sales which include both the rendering of services and the transfer of property present difficulties. Repairing a garage or shoe repairman, department store sales of articles which it installs, services rendered by building contractors, shampoos by barbers, tailor-made clothing, are examples of cases involving difficult problems of proper tax base.
Retail prices frequently may include installation and transportation charges. Most of the States specifically allow the deduction of installation charges from gross sales provided that records are so kept as to identify such charges. /1/ Approximately half of the States allow a deduction for transportation charges "if such charges are rendered to the purchaser and not to the seller." Other States permit the exemption of transportation charges when separately billed to the purchaser.
The treatment of trade-ins presents administrative problems under retail sales taxes. Several of the State sales taxes permit a deduction of the allowance for trade-ins from the price of the new article and tax the trade-in when it is sold. Other States tax the full sales price of original stock and exempt the trade-in when it is sold, regardless of whether it is sold for cash or whether another item is traded in as part-payment. In order to make sure that deductions allowed for receipts from sales of trade-ins are not in excess of the original valuation of such trade-ins, special records must be kept of individual transactions.
Installment sales present several administrative problems. In order to arrive at uniform bases of taxation, finance and interest charges should be excluded. Some of the States sales taxes provide specifically for exemption of such charges if they are separately billed and proper records are kept.
Questions also arise with respect to when the tax should be collected on installment sales, whether on the full selling price at the time the sale is made or upon the payments as they are received. Open credit accounts present somewhat similar problems as to the time of payment of tax and the treatment of worthless accounts.
3. DEFINITION OF "ARTICLES FOR FURTHER MANUFACTURE"
The definition of "articles for further manufacture" depends on the administrative limits to tax-free sales and the extent to which multiple taxation is to be avoided. Limiting tax-free articles to those (1) for use as materials in the manufacture of or as component parts of a taxable article, (2) for resale by the vendee for such use by his vendee, and (3) even broadening the concept to include those articles representing "direct expense," does not avoid multiple taxation but merely delimits it.
Whatever the line of demarcation between tax-free "articles for further manufacture" and taxable articles, difficult problems of administrative interpretation will arise. To mitigate this general problem it may be necessary to define articles for further manufacture specifically and, perhaps, also to provide a higher degree of finality with respect to administrative findings of fact than has heretofore been permitted the Commissioner of Internal Revenue. Under the Canadian sales tax the Minister is "the sole judge as to whether or not goods are 'partly manufactured goods' within the meaning" of the Act.
Unless the retail form of sales tax applies only to articles sold by retailers (in the ordinary sense of the term) to final consumers (as distinguished from industrial and commercial users), the problems of administering exemption of "articles for further manufacture" probably would be as great as under the other two forms of sales tax.
4. PROBLEMS OF SHIFTING
Under the retail sales tax it is difficult, if not impossible, to collect the specified percentage of tax on individual sales. The States have attempted to frame methods of collection whereby retailers will recover ON AN AVERAGE the amount they must pay the State. State administrators generally have prescribed a schedule for uniformly adding the tax to prices.
Under the schedule or bracket system the amount to be collected on sales of various sizes is specified. While it is simple enough in its operation, it does not provide precision. There necessarily must be discrimination or penny-splitting. For example, under the New York City sales tax schedule, a one-cent sales tax on a 13-cent package of cigarettes represents a tax of about 8 percent of the purchase price. At the same time, a 50-cent purchase also calls for a one-cent tax, representing in this case exactly 2 percent of the purchase price.
It is difficult to devise a retail sales tax schedule which will permit all kinds of retail businesses to shift the exact amount of tax. This difficulty arises from the limited divisibility in the medium of exchange (one cent) and the small size of many retail sales. To mitigate the difficulty, ten of the States now minimize effective tax rate variations by providing a taxpaying medium in fractional-cent denominations. Tokens eliminate most of the inequity in applying the sales tax to small purchases but they are a source of annoyance and inconvenience to the taxpayer and create some danger of counterfeiting. Because of the nuisance aspects, some States have abandoned their use.
5. REGISTRATION AND LICENSING
In administering tax-free sales under any one of the three forms of sales tax, a system of licenses or registration probably would be required. The license or registration method has the administrative advantage of tending to shift the policing of exempt articles for further manufacture to the licensees or registrants.
Under a licensing system, manufacturers, wholesalers, and retailers would be required to take out licenses at a nominal fee and post bonds in varying amounts, depending on the size of the licensee's probable tax liability. This method is now used in Canada and Australia.
The registration system now existing under the manufacturer's excise taxes with respect to certain sales could be expanded for general sales tax use. The license system appears to have no advantage over a registration system for purposes of controlling tax-exempt sales under a manufacturer's or wholesaler's sales tax. If the self- interest of manufacturers and wholesalers will induce them to apply for certificates of registration, the requirements and penalties under registration could be identical with those under license. The registration system has the advantage of appearing to be voluntary, whereas the license system is compulsory.
Licenses or compulsory registration probably would be a necessary feature of a retail sales tax. For enforcement purposes, it would be necessary to have a census of retailers. The mortality rate of retail business is high and the administrator must have some method of discovering new businesses and getting returns from discontinuing or bankrupt businesses. Eighteen of the twenty-two States having general sales taxes require taxpayers either to register once or to obtain an annual license.