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Types of Sales Taxes

When we use the term "sales taxes" in a generic sense, we're referring to the taxes that states impose on retail sales. However, there are actually different types of sales taxes. In fact, in many states there are actually several distinct taxes that together comprise the state's sales taxes. For example, in Arizona, there are distinct sales taxes on such businesses as retailers, restaurant operators, contractors, and real estate rental companies.

Getting back to the types of sales taxes — is the distinction of any significance to you? Before we answer this question, let's identify the three general types of sales taxes:

  • Seller or vendor privilege taxes — these taxes are imposed on retailers for the privilege of making retail sales in the state. Retailers usually have the option of absorbing the tax (that is, paying the tax out of their own pockets) or passing it along to their purchasers.
  • Consumer excise taxes — these taxes are imposed on the persons who make retail purchases in the state. In the states that impose this type of tax, sellers serve purely as agents who must collect the tax on the state's behalf. Because the tax is primarily the purchaser's responsibility, sellers don't have the option of absorbing the tax and usually must separately state the tax on the receipts or invoices they provide their purchasers.
  • Retail transaction taxes — these taxes are imposed on the retail sale transaction itself, with the primary liability for paying the tax falling upon both the sellers and the purchasers. Sellers are responsible for collecting and paying the tax, and purchasers are responsible for paying the tax that the sellers must collect and pay. In essence, this type of sales tax is a hybrid of the other two types. Operationally, however, it's closer to a consumer excise tax because sellers are not given the option to absorb the tax.

From a legal standpoint, knowing the type of sales tax you are dealing with is important because it determines who can be liable for the tax, who can sue on the tax, or who can make a claim for refund of the tax. The vast majority of states have a consumer sales tax, where the buyer bears the legal burden of the tax and the seller is required to collect and remit the tax to the state.

Few states have the seller privilege tax option. Kentucky, for example, does, but its effectiveness as a marketing tool is limited because advertising the absorption of sales tax by a seller is illegal. A few, such as Michigan, have a privilege tax that is offset by sales tax revenues collected, as an incentive for retailers to collect the correct amount of tax.

From your perspective as a purchaser, knowing the type of sales tax with which you're dealing will help you properly handle sales taxes that are not billed. If you're dealing with a vendor privilege tax, you should never voluntarily pay a tax that hasn't been billed to you, because the tax is the seller's responsibility. In contrast, if you're dealing with a consumer excise or retail transaction tax, you shouldn't ignore any unbilled tax. Unless you have some written proof that you paid the tax, you can be held personally liable for the unpaid tax. If the unbilled tax wasn't caused by a seller's oversight that can be corrected with a new receipt or invoice, you should remit the tax directly to the state.