FEDERAL MANUFACTURERS', WHOLESALE AND RETAIL SALES TAXES
A memorandum prepared by the Treasury
This memorandum describes the principal features of three types of general sales taxes: (1) a manufacturers' tax, (2) a wholesale sales tax, and (3) a retail sales tax. Numerous proposals have been made for a Federal sales tax. None of these has been enacted. A legislative history of the proposals for a Federal sales tax is given in Exhibit 1. Sales taxes are now being levied by 22 States (see Exhibit 2) and by several foreign countries (see Exhibits 3).
A. TAX BASE
1. MANUFACTURERS' SALES TAX: A manufacturers' sales tax is one which applies to sales of tangible personal property by manufacturers and producers. The tax ordinarily applies to finished articles when in a form packaged and labeled ready for shipment or delivery to final users and consumers. The tax ordinarily does not apply to services, although sales of gas and of electrical energy are sometimes included.
2. WHOLESALE SALES TAX: A wholesale sales tax is one which applies to sales at wholesale of tangible personal property when in a form packaged and labeled ready for shipment or delivery to final users and consumers. Like the manufacturers' sales tax, the wholesale sales tax ordinarily excludes services, although sales of gas and electrical energy are sometimes included.
3. RETAIL SALES TAX: A retail sales tax is one which applies to sales at retail of tangible personal property to final consumers and industrial users. It ordinarily applies not only to retail sales of consumers' goods but also to final sales of finished articles, such as machinery, equipment and supplies to industrial and commercial users. In addition, a retail sales tax may apply to various types of services, such as public utilities, communication, transportation, the operation of places of amusement and services such as those rendered by hotels, rooming houses, office buildings and parking lots. Some State retail sales taxes include none of those services; others include some of them, while a few include all of them. Generally, personal, professional or repair services are not subject to the retail sales tax.
Since services are frequently rendered along with the sale of a commodity at retail, they are more commonly included in the retail sales tax than in the manufacturers' or wholesale sales tax.
In this memorandum it is assumed that the retail sales tax applies to only tangible personal property.
4. SALE PRICE: Under any one of the three types of taxes, the tax ordinarily applies to the sales price of the article in a finished form ready for shipment or delivery to the final user or consumer. The sales price for tax base purposes usually includes charges for coverings and containers of whatever nature, and charges incident to placing the article in condition packed and ready for shipment to the final user or final consumer.
B. PERSONS SUBJECT TO TAX
1. MANUFACTURERS' SALES TAX: A manufacturers' sales tax would be paid by manufacturers, producers, and importers, unless the manufactured articles are specifically exempt. In addition to manufacturers, taxpayers would also include those wholesalers and retailers who do some manufacturing.
2. WHOLESALE SALES TAX: A wholesale sales tax would be paid by persons making sales at wholesale. Since persons other than wholesalers sell to wholesale, taxpayers might also include manufacturers, importers, and retailers.
3. RETAIL SALES TAX: The retail sales tax would be paid by persons making sales at retail. Taxpayers under a retail sales tax would include many manufacturers and wholesalers as well as retailers since under our integrated economic business structure some businesses of all these types make final sales to users and consumers.
1. PREVENTION OF MULTIPLE TAXATION: In order to avoid multiple taxation, provision must be made for the exemption of sales at stages other than that at which the tax is imposed. Under a manufacturers' sales tax, this requires provision for tax-free sales of articles for further manufacture. The wholesale sales tax requires, in addition, the exemption of sales of finished articles intended for resale to persons other than retailers and final users or consumers. The retail sales tax also would require the exemption of articles for further manufacture and articles for resale to persons other than final users or consumers.
2. EXEMPTION OF PARTICULAR ITEMS: As under existing manufacturers' excises, exemption might also be accorded sales to Federal and State government and their agencies, sales for export, sales for shipment to United States' possessions, sales of certain supplies for use on certain vessels and foreign aircraft, and sales of articles produced by Indians. In the aggregate, these exemptions would reduce the size of the tax bases appreciably. Especially important during the war period are sales to the Federal Government.
Articles already subject to excise taxes might or might not be exempted from a general sales tax, irrespective of the form of the tax. In addition, other general classes of items (such as foods, clothing, and medicines) might be exempted. Each exemption, of course, reduces still further the based of the tax.
The exemption or other favored treatment of specific articles raises administrative problems of drawing a precise line between exempted and taxable items. For example, in the administration of the exemption of foods under some State retail sales taxes, it has been found necessary to list in detail items of food and the brand names of many items that are and are not to be regarded as foods. The administrative experience under the Australian wholesale sales tax has been similar to that under the State retail sales taxes.
3. EXEMPTION OF PARTICULAR TAXPAYERS
a. MANUFACTURERS' AND WHOLESALE SALES TAXES: Under the manufacturers' and wholesale taxes, it might be found desirable, from the administrative point of view, to exempt those with annual gross sales below a specified amount. The 1937 Census of Manufactures data indicate that under the manufacturers' tax an exemption of $20,000 probably would reduce the number of taxpayers by 30 percent and the tax base by not much more than 1 percent. The 1935 Census of Business data indicate that under a wholesale sales tax, such an exemption probably would reduce the number of taxpayers by about 35 percent and the tax base by less than 5 percent.
Exempting the small taxpayer, however, makes it difficult to detect evasion by sellers whose sales are only slightly above the amount exempt. Furthermore, a substantial part of the cost of administering the tax would not be saved by making exemptions, since it would be necessary in any event to license or register all sellers, including those exempt.
b. RETAIL SALES TAX: The exemption of small taxpayers might be found more pressing under the retail form of tax than under the manufacturers' or wholesale taxes because of the larger number of retailers. However, such exemption would afford greater opportunities for tax evasion and greater likelihood of competitive inequalities than would be true under the manufacturers' or wholesale taxes where there would be fewer very small business units.
The 1935 census data indicate that the exemption of retailers with annual sales of less than $1,000 would reduce the number of taxpayers under a Federal retail sales tax by about 30 percent and the tax base by less then 2 percent. A $5,000 exemption would reduce the number of taxpayers by 50 percent and the tax base not much more than 3 percent. However, a $5,000 exemption would introduce inequalities among competitors in certain retail lines. For example, in the candy and confectionery trade, 65 percent of the independent retail stores accounting for 24 percent of the sales reported sales of less than $5,000 in 1935. A $20,000 retail sales exemption would reduce the number of taxpayers about 80 percent and the tax base about 17 percent.
D. ESTIMATES OF REVENUE
Since sales to governments would likely be exempted the vast increase in purchases by the Federal Government during war time would reduce the volume of taxable goods, thereby reducing the volume of goods subject to the sales tax. This might be offset in part by price rises. At the same time, in wartime a larger part of consumer expenditures are likely to be directed towards services instead of commodities, since the demand for war purposes affects the available supply of commodities more than it affects the supply of services.
Estimates of the yields of sales taxes at the manufacturers', wholesale, and retail levels and at rates of 1, 5, and 10 percent are given in Table 1. These estimates assume a volume of sales at the expected level of the fiscal year 1943 and are for a full year of tax collections after the tax had been in effect long enough to absorb the initial anticipatory buying as a result of its imposition.
Major interest attaches to items 4 to 9 of Table 1, since the first three items include taxes on goods sold to governments and to contractors for use in war production. At the manufacturers' level, a 10 percent tax yields $2,382 million on the broadest base that excludes sales to governments and war contractors; and $305 million on the narrowest base for which an estimate is given. At the wholesale level, a 10 percent tax yields from $3,059 to $446; and at the retail level, from $4,632 to $780.
The estimates are made on the basis of sales taxes which would be limited to sales of tangible personal property when in a form, packaged and labeled ready for shipment or delivery to final users or consumers.
Personal, professional, or repair services have not been included in the sales tax base. Sales of the following major industries have been exempted from the tax base except for such sales of tangible personal property as they make: The various types of service establishments (including finance, amusement, hotels, etc.), the communication industry, the transportation, trucking, and warehousing industries, utilities and extractive industries. Water, electricity, and gas are not treated as tangible personal property. Sales of finished products (i.e., not for resale to the same industry) by the extractive industries -- agriculture, forestry, fishing, and mining -- are exempt except as they are made directly to the ultimate consumer.
In the base of manufacturers' sales tax is included the value of the final sale at the manufacturers' plant of tangible personal property as a finished product. In general, any sale by a manufacturer of tangible personal property which is not for resale to other manufacturers is considered the sale of a finished product; e.g., sales to wholesalers, retailers, and ultimate consumers or users. Also, if the sale is to another manufacturer or processor who is the ultimate consumer or user, it is taxable. The exemption of manufactured products sold to other processors has been interpreted as applying only to goods that are further processed or are incorporated in other manufactures, and not as applying to goods like industrial machinery, fabricated construction materials, certain containers and wrappings, or office supplies, sold to other industrial users but not made an integral part of a factory product.
The contents of the base of the tax on sales at wholesale include the final sale of tangible personal property at wholesale as a finished product. In general, the base includes all sales by either wholesalers or manufacturers to ultimate consumers or retailers.
The tax on sales at retail is on the final sale of tangible personal property to the ultimate consumer or user and is distinguished from the sale of (a) realty or of (b) intangibles, such as the sales of service establishments. The ultimate consumer is deemed to be the purchaser who actually consumes the tangible personal property. "Sales at retail" is not synonymous with "sales by retailers"; it includes sales by manufacturers or wholesalers to the ultimate consumer or user. Whereas sales of tangible personal property by manufacturers to whole-salers or retailers for resale are included in the tax on manufacturers, such sales are excluded from the tax on sales at retail. Thus, the sale at retail would include the value added by distributors or the spread between the values of finished commodities at producers' prices and their cost to the ultimate consumer.
E. TAX RATES
1. RATES NEEDED TO RAISE THE SAME AMOUNT OF REVENUE FROM THE THREE TYPES OF SALES TAX: As the revenue estimates given above indicate, a lower tax rate would be needed to raise a given amount of revenue from a retail sales tax than from a wholesale or a manufacturers' sales tax because of the differences in sales prices at the different stages of production and distribution. Table 2 presents rates of tax on sales of tangible personal property at the manufacturers', wholesale, and retail levels necessary to yield $1 billion.
The rate needed under a manufacturers' sales tax is from 1.3 to 2.5 times the rate needed under a retail sales tax, the exact difference depending on the exemptions granted. The rate needed under a wholesale sales tax is from 1.2 to 1.8 times the rate needed under a retail sales tax.
Table 1. Estimated yields of sales taxes on tangible personal property at the manufacturers', wholesale, and retail levels, with rates of 1, 5, and 10 percent (In millions of dollars) ______________________________________________________________________ Manufacturers' Sales at sales wholesale ____________________________________ 1% 5% 10% 1% 5% 10% ______________________________________________________________________ 1. All sales of finished articles (including industrial and commercial machinery, equipment and supplies not resold as part of tangible personal property) 759 3,780 7,471 833 4,143 8,142 2. Same as (1), but exempting sales to Federal Government and its agencies. 378 1,875 3,661 452 2,238 4,332 3. Same as (2), but exempting sales to State and local Governments 368 1,825 3,561 442 2,188 4,232 4. Same as (3), but exempting final sales to contractors for use in war production 248 1,228 2,382 322 1,592 3,059 5. Same as (4), but exempting tangible personal property subject to Federal excise taxes 155 771 1,513 216 1,069 2,083 6. Same as (5), but exempting sales of foods, (excepting restaurant meals, etc.) 77 384 760 100 496 980 7. Same as (6), but exempting sales of medicines and drugs 72 359 712 94 466 922 8. Same as (7), but exempting sales of clothing (i.e. all wearing apparel) 32 159 317 46 232 461 9. Same as (8), but exempting sales of fuels /1/ 31 153 305 45 224 446 [table continued] ______________________________________________________________________ Sales at retail __________________________________ 1% 5% 10% ______________________________________________________________________ 1. All sales of finished articles (including industrial and commercial machinery, equipment and supplies not resold as part of tangible personal property) 1,014 5,018 9,702 2. Same as (1), but exempting sales to Federal Government and its agencies. 633 3,113 5,892 3. Same as (2), but exempting sales to State and local Governments 623 3,063 5,792 4. Same as (3), but exempting final sales to contractors for use in war production 503 2,469 4,632 5. Same as (4), but exempting tangible personal property subject to Federal excise taxes 349 1,721 3,296 6. Same as (5), but exempting sales of foods, (excepting restaurant meals, etc.) 174 864 1,691 7. Same as (6), but exempting sales of medicines and drugs 166 824 1,616 8. Same as (7), but exempting sales of clothing (i.e. all wearing apparel) 81 404 799 9. Same as (8), but exempting sales of fuels /1/ 79 394 780
Treasury Department, Division of Research and
Statistics March 14,
Table 2. Rates of tax on sales of tangible personal property at the manufacturers', wholesale and retail levels necessary to yield $1 billion /1/ ______________________________________________________________________ Rates needed to raise $1 billion Manufac- Whole- turers' sale Retail tax tax tax ______________________________________________________________________ 1. All sales of finished articles (including industrial and commercial machinery, equipment and supplies not resold as part of tangible personal property) 1.3% 1.2% 1.0% 2. Same as (1), but exempting sales to Federal Government and its agencies 2.6 2.2 1.6 3. Same as (2), but exempting sales to State and local Governments 2.7 2.3 1.6 4. Same as (3), but exempting final sales to contractors for use in war production 4.0 3.1 2.0 5. Same as (4), but exempting tangible personal property subject to Federal excise taxes 6.5 4.6 2.9 6. Same as (5), but exempting sales of foods (excepting restaurant meals, etc.) 13.0 10.0 5.7 7. Same is (6), but exempting sales of medicines 13.9 10.6 6.0 8. Same as (7), but exempting sales of clothing 31.3 21.7 12.3 9. Same as (8), but exempting sales of fuels 32.3 22.2 12.7 ______________________________________________________________________ Treasury Department, Division of Tax Research March 14, 1942 Source: Based on Table 1.
2. EFFECT OF THE RATE ON THE ADMINISTRATION OF THE TAX: In general, greater administrative problems will be encountered under high than under low tax rates. High tax rates aggravate inequalities and give taxpayers a greater incentive to evade the tax. In the initial stages of the tax, when a new staff must be trained and a body of experience built up, such administrative problems are especially difficult.
3. DIFFERENTIAL TAX RATES: The items subject to tax might be classified according to type of article or price of article and different rates imposed on different groups. For example, the British purchase tax levies a 33-1/3 percent tax on the wholesale value of luxuries and articles not normally requiring immediate replacement, and a 16-2/3 percent tax on the wholesale value of non-luxuries which are not subsistence goods.
Any such differential tax rates would contribute to administrative problems. The setting up of a class of articles subject to a low rate is an invitation to producers and sellers of closely related articles to get their articles under the low rate either by law or administrative regulation. The setting of a higher rate on articles selling above some specified price is and invitation to producers and sellers of such articles to make their articles subject to the lower rate by cutting price, by cutting quality, by selling the article in separate pieces, or by selling the article in combination with other lower priced articles.