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Sales tax creates more unnecessary pain than value added tax

dyno-might.github.io

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Re: Sales tax creates more unnecessary pain than value added tax

#111

Post by mmcconnell1618 »

rgbrenner wrote: post #11

I'm going to take a wild guess and say the author isn't from the US. He includes sales tax on items purchased for resale.... which is an exception in every state that I know of. Even if you purchase an item at retail with sales tax, you can file to receive the money back from the state. Additionally sales tax has nothing to do with whether your supply chain is fully integrated, and hiring all of your suppliers as emp…

The example also misses out on the fact that the individual producers (coconut picker, paint maker, etc.) will need to pay self employment tax. That is an extra amount they pay when working for themselves as independent contracts but if they are hired by the cousin's business, that business pays half of the social security and medicare taxes.

For easy numbers, in the independent contractor model, each person pay $0.30 in payroll taxes (before income tax) while in the employee model, the employee only pays $0.15 and the business pays the other $0.15. If gross pay is $1 in both cases, the employee makes more. Because of this, real employers are going to pay salaries of less than $1 to account for overhead like payroll taxes, office space and the risk of providing a steady paycheck vs. paying per production.

I understand the author is simplifying things to make an argument for VAT but there are lots of variables in both scenarios including payroll tax and the option for retailers to purchase goods without paying sales tax to wholesalers.

Re: Sales tax creates more unnecessary pain than value added tax

#112

Post by lazyjones »

I cannot comment on the sales tax explanation, but the VAT one is completely wrong. Businesses don't pay VAT (unless they are not in the VAT system, e.g. when they are too small or their business is exempt for other reasons), when they charge other businesses VAT they have to pass it to the tax authorities and when they are charged by other businesses, they get it refunded by the tax authorities. The (consumer) customer will pay the VAT surcharge, unless he exports the product to a country with no VAT (or different VAT), in that case he gets a refund and will typically pay the VAT of his country of residence.

Whatever the VAT advantages/differences over sales tax may be, the EU has lost many billions in VAT fraud schemes.

Re: Sales tax creates more unnecessary pain than value added tax

#113

Post by sitharus »

I thought VAT models were used because it forces honesty at all levels. If you want to claim back the VAT on your inputs you have to declare them, so the tax department can spot a difference between declared inputs and outputs. It’s still possible to fiddle the numbers but harder than pure sales tax.

Re: Sales tax creates more unnecessary pain than value added tax

#114

Post by Meekro »

Could anyone who's running a SaaS company in the US discuss what they use for sales tax compliance, ideally something that'll work with Stripe?

The Supreme Court's Wayfair ruling has recently forced US companies to start collecting sales tax in states where they have no presence, and for some states it's crazy complicated to figure out exactly how much tax you're supposed to charge each particular customer.

Before the Wayfair ruling, a Texas company could just say "IP Geolocation- customer in Texas? Y/N." Collect sales tax if Y. Remit taxes, keep records, and you're good on compliance. The rate would be based on your company's Texas address, so you'd charge the same sales tax rate to every Texas customer. If you were a California company, you'd charge no sales tax to anyone.

But now you're collecting for a variety of states that you have no presence in, and some will be crazy complicated. For example, Louisiana says out-of-state sellers have to identify the exact address for every buyer and match it to a huge database of tax districts to figure out which rate to charge that customer. It's crazy! A non-US SaaS company selling into the US would have a huge competitive advantage from not having to figure out this mess.

Anyway, I'd love to hear from you SaaS guys about your compliance strategies!

Re: Sales tax creates more unnecessary pain than value added tax

#115

Post by nraynaud »

telaandrews2 wrote: post #108

I lead product for one of the leading US sales tax solutions, and have also built products automating EU VAT solutions. I came into these roles with little subject matter expertise, but with enthusiasm for making it easier for small businesses to thrive. So, take these inputs with that perspective, please. VAT tax rate calculations are trivial, but filing returns is complex. Sales tax calculations are complex, and so…

I think the EU made a really good computer system with the VAT, it’s way easier than sales taxes accros state borders.

For curious people: every business entity has a VAT number. VAT has to be paid to the customer’s country (for individuals), the computer system tells you the country rate when you establish the bill. When it’s time to pay, you tell your own government how much you collected for each country and give them the loot. And the countries settle their VAT bills at the state level.

Your red tape doesn’t grow with the number of countries you did business with. And there is no sneaky “you opened a tax nexus here, because you looked at me funny, and now you need a local accountant to sort it out”.

Re: Sales tax creates more unnecessary pain than value added tax

#116

Post by dyno-might »

russellbeattie wrote: post #97
dyno-might wrote: post #66

Earlier quoted context omitted.

Author here. I very much appreciate your polite tone! I'm aware that taxes on items for resale aren't treated like in the toy model. (This is mentioned in the article already.) Can you please take a look at this article and let me know if it changes your view: https://www.cost.org/globalassets/cost/state-tax-resources-p...

I think your VAT Regime illustration has a mistake. The $2.40 should be $3.60?

It looks OK to me. Do you mean the $2.40 in the text or in the table?

Re: Sales tax creates more unnecessary pain than value added tax

#117

Post by stainforth »

gamblor956 wrote: post #92
rahimnathwani wrote: post #57

Earlier quoted context omitted.

This is a really great explanation. I'm relatively new to the US, and the system of sales tax struck me as odd until I learned about the various reseller and other exemptions. The complexity (need for so many exemptions) suggests that the fundamental design may be flawed. If you have VAT, you can do with fewer rules.

VAT is more complicated than sales tax. Far, far more complicated. (I deal with VAT, sales tax, GST, CST, HST, and other consumption taxes as part of job.) The simplest form of consumption tax is the (Australian) GST: a flat 10% on almost all goods and services.

Do Australians have strong dislike of their setup as well?

Re: Sales tax creates more unnecessary pain than value added tax

#118

Post by jccooper »

mmcconnell1618 wrote: post #111
rgbrenner wrote: post #11

I'm going to take a wild guess and say the author isn't from the US. He includes sales tax on items purchased for resale.... which is an exception in every state that I know of. Even if you purchase an item at retail with sales tax, you can file to receive the money back from the state. Additionally sales tax has nothing to do with whether your supply chain is fully integrated, and hiring all of your suppliers as emp…

The example also misses out on the fact that the individual producers (coconut picker, paint maker, etc.) will need to pay self employment tax. That is an extra amount they pay when working for themselves as independent contracts but if they are hired by the cousin's business, that business pays half of the social security and medicare taxes. For easy numbers, in the independent contractor model, each person pay $0.3…

The self-employment tax is exactly the same as the employment tax your employer pays "for you" in payroll taxes. The numbers may look different to you as in individual because you don't see the taxes the business is paying for the privileged of employing you, but the tax impact is exactly the same and economically it's a wash.

Re: Sales tax creates more unnecessary pain than value added tax

#120

Post by joefourier »

TazeTSchnitzel wrote: post #65
tobias3 wrote: post #51

Earlier quoted context omitted.

If it works the same as in Germany you only pay no VAT if you buy from a company in another EU country as a company. Therefore the EU has both a sales tax and a VAT depending on if you look at individual countries or the EU as a whole.

No, you must pay VAT on intra-EU B2B transactions too. The accounting is more complicated because the buyer pays rather than the seller, but it is still there.

You don't pay VAT on intra-EU B2B transactions; the buyer adds the VAT amount at their country's rate to both the amount to pay and the amount to claim back, cancelling it out.
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