Estimates of the number of taxpayers under manufacturers', wholesale, and retail sales taxes which are comparable to the revenue estimates given above are not available. However, estimates for 1935, the latest year for which the necessary data were available, are presented in Table 3 to indicate the relative number of taxpayers under the three types of sales taxes. These estimates must be viewed as rough approximations, even for 1935. For example, the number of taxpayers under a manufactures' sales tax is unknown since manufacturers with annual sales of less than $5,000 are not reported by the Census of Manufactures. The number of small, unreported manufacturers is probable large. Furthermore, the Census reports manufacturing "establishments" rather than "manufacturers." Manufacturing establishments are more numerous than taxpayers because an unknown number of manufacturing plants were counted as two or more "manufacturing establishments."

                              Table 3.

        Estimated number of taxpayers under a manufacturers'
                wholesale, and retail sales tax, 1935

                                                     Estimated number
                                                       of taxpayers
Manufacturers' sales tax
     Assuming exemption of articles for further
     manufacture and of establishments with 
     annual sales of less than $5,000                      139,000

Wholesale sales tax
     Assuming exemption of articles for further
     manufacture and articles for resale at
     wholesale, and of establishments with 
     annual sales of less than $5,000                      258,000

Retail sales tax
     1. Assuming exemption of articles for
        further manufacture                              2,386,000

     2. Same as 1 but also exempting those
        with annual sales of less than $5,000            1,191,000
Treasury Department, Division of Tax Research March 14, 1942


For a variety of reasons, any type of general sales tax would not affect all taxpayers uniformly. The circumstances resulting in unequal taxation are explained below.

1. UNDER A MANUFACTURERS' SALES TAX: Under a manufacturers' sales tax uniform treatment would be reached most practicably by adjusting all prices, irrespective of type of business organization, to the sales price at which manufacturers sell to wholesalers and to industrial users. Less than 50 percent of manufacturers' sales in 1935 were made to industrial users and wholesales. The remainder of the sales by manufacturers were made to their own wholesale branches, to their own retail stores, to retailers, and to household consumers, all of which represent substantially different prices from the prices to wholesalers. Such prices would need to be adjusted to a uniform price basis, which would be administratively very difficult.

Unless the manufacturers' sales tax were levied on a uniform price basis, such as the f.o.b. price to wholesalers of finished articles finally packaged and labeled ready for shipment and delivery, serious changes would undoubtedly occur in the forms of business organization and business transactions as a result of the attempt to minimize taxation. Business organizations would be encouraged to reorganize their production and distribution functions under separate legal entities. Where one company existed before the tax was levied several might arise. It might become advantageous for taxpayers to get under the control of the same business organization a manufacturing company, a packaging and labeling company, and a selling company, if the taxpayer could successfully maintain that the transaction prices between subsidiary units constitute the proper bases of tax. Since such transactions would not be arm's-length sales, the administrative problems might be very difficult. Other manufacturers might attempt to reduce the tax base by having the manufacturing done by contractors.

Small taxpayers might not be able (and others might not be willing) to undertake the apparent legalistic outlets to tax inequality and would suffer competitive disadvantages.

2. UNDER A WHOLESALE SALES TAX: The problem under a wholesale sales tax are similar to those outlined above for a manufacturers' tax. However, sales appear to be more homogeneous at the wholesale level of sales than at the manufacturers' level of sales f.o.b. plant.

In 1935, about 75 percent of the sales of wholesale establishment that reported the distribution of sales by classes of customers were made either to retailers or to industrial users. These sales represent the base to which it would be necessary to adjust all other types of sales under a wholesale sales tax.

3. UNDER THE RETAIL SALES TAX: The retail sales tax likewise involves the problem of tax base uniformity encountered under the manufacturers' and wholesale form of sales taxes, since, for example, sales of finished articles to industrial users would be taxed as sales at retail.

In 1935, about 43,000 manufacturers made about $11 billion of sales (valued at f.o.b. prices for census purposes) to industrial users. These sales probably were made at prices ranging from f.o.b. plant to door-delivery and some price quotations no doubt would include installation charges. In the same year, wholesalers reported about $10 billion of sales to industrial users. For administrative reasons, finished articles purchased by building contractors, tailors, barber and beauty shops, repair shops, and other service establishments such as laundries may be taxed when sold to them, although in many cases such establishments also sell articles at retail. Thus the retail tax would not attach uniformly at the point of sale of articles at retail to final consumers but would include sales at different levels of production and distribution to industrial users and persons selling taxable finished articles in combination with services. The variations in sales prices of such articles would reflect the embodiment of different amounts of the production an distribution functions, and changes in the forms of business organization and methods of sale might consequently result in the attempt to avoid unequal taxation.

Retail prices to final consumers vary as regards the elements of cost included. Unless adjusted, these prices would not constitute a uniform base for tax purposes. Transportation and delivery, and other charges for credit, installation, insurance, guarantees and repairs, enter directly or indirectly into every sales transaction. However, great variations exist among competitors (whether they be manufacturers, wholesalers or retailers) in the manner in which these cost elements are included in or excluded from their sales prices. Unless provision is made for adjustment of these types of differences from a uniform price basis, certain taxpayers may have to change their mode of business or suffer competitive disadvantages.


Even though levied on all items at a uniform rate, a sales tax of whatever form is unlikely to affect all prices equally. The possibilities of multiple taxation and pyramiding are two of the most important factors leading to an unequal effect of the sales tax on prices.

1. MULTIPLE TAXATION: The possibility of multiple taxation arises because it is difficult to define comprehensively "articles for further manufacture." If the definition exempted only articles that entered as "physical parts" of finished articles, then all other articles like, for example, machinery, equipment and office supplies, contributing to the cost of producing and distributing finished articles would be taxed once as finished articles and again as component costs entering into the sales price of finished articles. Consequently, the accumulated sales tax on any one finished article and the sales price to the consumer would be greater than is indicated by the rate of tax.

2. PYRAMIDING: The increase in price as a result of a sales tax may be larger than the sales tax itself if the seller's margin is a relatively fixed percentage of the price at which he purchases goods for resale. In such a case, if the tax has been paid on the items purchased for resale, the application of the customary percentage margin will raise the final price by more than the amount of the tax. The final users or consumers of taxable articles may, therefore, pay more in increased prices as a consequence of the tax than the Government receives in revenue. Pyramiding differs from multiple taxation in that the latter is an accumulation of tax that the Government receives while the former is a tax-induced addition to a seller's spread or margin that is not received by the Government.

The available data indicate that distributors' margins are relatively rigid and that, consequently, pyramiding is likely to occur. The nearer to the final consumer a sales tax is imposed the less is the opportunity for pyramiding to occur. Accordingly, pyramiding is less under a retail sales tax than under a wholesale sales tax and less under a wholesale sales tax than under a manufacturer's sales tax.


The burden of general sales taxes is distributed regressively; that is, the tax borne by final consumers constitutes a larger percent of a small income than of a larger income. Persons with small incomes spend a larger proportion of their incomes than do persons with large incomes. Furthermore, a larger fraction of their expenditures are in general for tangible goods as contrasted to services.

Table 4 presents rough estimates for 1942 of the distribution of a retail sales tax expressed as a percentage of consumer income. This table does not show the actual percentage of consumer income taken by a retail sales tax. It only shows the relative distribution of tax burden among the several consumer income groups. The table also shows the grater importance of food in the budgets of the lower income groups by estimating the difference in the relative distribution of sales tax burden when foods are exempted.

                               Table 4

    Rough estimates of the relative distribution of retail sales 
     tax burden for 1942, expressed as a percentage of consumer
         incomes by income classes, with food taxed and with
                        food exempt from tax

                                        Relative percentage
                                      of incomes taken by tax
        Consumer           __________________________________________
      income class             If tax base              If tax base
                              included food            excluded food
        Under $500                1.00% /1/                1.00% /1/
      500 -    750                 .80                      .90 
      750 -  1,000                 .75                      .90 
    1,000 -  1,250                 .71                      .87 
    1,250 -  1,500                 .67                      .85 
    1,500 -  1,750                 .65                      .85 
    1,750 -  2,000                 .62                      .85 
    2,000 -  2,500                 .59                      .82 
    2,500 -  3,000                 .56                      .82 
    3,000 -  4,000                 .53                      .79 
    4,000 -  5,000                 .49                      .77 
    5,000 - 10,000                 .42                      .69 
   10,000 and over                 .27                      .49
Treasury Department,                               March 14, 1942
Division of Tax Research

Source: Based on information obtained from the Office of Price 
        Administration, Research Division.
/1/ At a sales tax rate which imposes a burden of 1% of consumer i


The administrative problems under a general sales tax fall into two general categories: The rapid development of additional administrative personnel and the determination of regulations designed to tax all articles uniformly.

1. PROBLEMS 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. These expenses will tend to be largest in the initial stages of the tax when the staff is being built up and experience accumulated.

The administrative problems associated with the number of taxpayers are greatest under a retail sales tax. The tax must be collected in smaller amounts and from a larger number of taxpayers than the other two forms of sales tax. On the other hand, the manufacturers' and wholesale sales taxes involve serious problems of determining uniform prices for tax base purposes.

2. DEFINITIONS AND UNIFORMITY OF TAX BASE: Under the manufacturers' sales tax, many borderline cases would arise over the question of what constitutes a manufacturers' sales price. In industries that produced similar articles in varying stages of completion, equal treatment of different firms would require that such items as the value of packages and containers and selling and advertising expenses by uniformly excluded so as to approximate and f.o.b. price. However, the uniform exclusion of such charges and expensed from the tax base also introduces difficult administrative problems. That is, the tax base frequently might 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 could 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 varied greatly among taxpayers producing the same articles, it might be exceedingly difficult to establish general regulations.

Under the wholesale sales tax, the same types of problems would also be encountered. Here equal treatment of different taxpayers would require that such items as the value of packages and containers and selling and advertising expenses by uniformly included in the tax base. However, administrative problems resulting from attempts to achieve a uniform tax base might be expected to arise less frequently than under a manufacturers' sales tax.

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 to tangible personal property. Sales that involve both the rendering of services and the transfer of property present difficulties. Repairing by a garage or shoe repairman, department store sales of articles that it installs, services rendered by building contractors, shampoos by barbers, and tailor-made clothing are examples of cases involving difficult problems of the proper tax base.

Retail prices often include installation and transportation charges. Most States specifically allow the deduction of installation charges from gross sales if records are so kept as to identify such charges. 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 sales of trade-ins are not in excess of the original valuation of the trade-ins, special records must be kept of individual transactions.

Installment sales present additional administrative problems. In order to arrive at uniform bases of taxation, finance and interest charges should be excluded. Some of the State sales taxes provide specifically for the exemption of such charges if they are separately billed and proper records are kept. Questions also arise whether the tax should be collected 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 exemption of "articles for further manufacture" is necessary to avoid multiple taxation, but it raises difficult problems of definition and interpretation. 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 limits 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.

The problem of administering exemption of "articles for further manufacture" probably would be as great under a retail sales tax as under the other two forms of sales tax.

4. PROBLEMS OF TAX AMOUNTING TO A FRACTION OF A CENT: 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.

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 this 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.

Many of the States 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 announce 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 methods 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 voluntary registration system now existing under the manufacturers' 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 manufacturers' or wholesale 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 licenses.

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. Most of the States having general sales taxes require taxpayers either to register once or to obtain an annual license.